Practice Quiz 8

Question 1

Under a floating exchange rate system, the exchange rate

Answer 1

fluctuates in response to changing economic conditions

Question 2

if the short run equilibrium in the mundell-fleming model is represented by a graph with Y along with horizontal axis and the exchange rate along the vertical axis, then the LM curve

Answer 2

is vertical because the exchange rate does not enter into the LM equation

Question 3

in a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to

Answer 3

increase the money supply

Question 4

in a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short run equilibrium

Answer 4

the exchange rate will rise, but income will remain unchanged

Question 5

in the mundell-fleming model, the domestic interest rate is determined by the

Answer 5

world interest rate

Question 6

to maintain a fixed exchange rate system, if the exchange rate moves below the fixed exchange rate level, then the central bank must

Answer 6

sell foreign currency from reserves

Question 7

in a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short run equilibrium

Answer 7

imports will decrease and exports will decrease by an equal amount

Question 8

in a small open economy with a floating exchange rate, if the government increases the money supply then in the new short run equilibrium the

Answer 8

exchange rate falls and net exports increase

Question 9

The mundell-fleming model is a ____ model for a ____ open ecoomy

Answer 9

short run; small

Question 10

The mundell-fleming model assumes that…

Answer 10

as in the IS-LM model, prices are fixed

Question 11

In order to compensate for an expected future decline in the Japanese yen relative to the US dollar, the interest rate in Japan must be ____ the interest rate in the united states

Answer 11

higher than

Question 12

an increase in income generated by an increase in the country risk premium will not occur if there is a(n) ____ sufficient to offset the decline in the demand for money caused by the higher risk premium

Answer 12

decrease in the money supply

Question 13

one argument favouring a fixed exchanged rate system is that it

Answer 13

reduces exchange rate uncertainty, thereby promoting more international trade

Question 14

a monetary union with a common currency is an example of a

Answer 14

fixed exchange rate system

Question 15

a change in investors perceptions that make a fixed exchange rate untenable is known as

Answer 15

a speculative attack

Question 16

if a country chooses to restrict international capital flows and to maintain a fixed exchange rate, then it must

Answer 16

control its citizens access to financial markets

Question 17

the introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars to domestic cars, will, according the mundell fleming model with floating exchange rates, lead to:

Answer 17

no change in income or net exports

Question 18

a fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the mundell fleming model with floating exchange rates, lead to:

Answer 18

no change in income but a rise in net exports