Week 12 - Chapter 19

Question 1

In the open economy IS-LM model, what impact does an increase in interest rate have?

Answer 1

1. Decreases in output
2. Appreciation of exchange rate

Question 2

What does an appreciation of exchange rate mean?

Answer 2

1. appreciation of currency
   = > Decrease in competitiveness of goods
   = > decrease in net exports

Question 3

What is the Mundell-Fleming model?

Answer 3

Open economy extension of the IS-LM model

Question 4

How does an increase in gov spending affect the open economy IS-LM model

Answer 4

1. Y increases
2. i is constant
3. Real interest rate is unchanged
4. Reduction in net exports

Question 5

What is a twin deficit?

Answer 5

Increasing budget deficit leads to trade deficit