1.

The Mundell-Fleming model is a ______ model for a ______ open economy.

A.

short-run; small

B.

short-run; large

C.

long-run; large

D.

long-run; small



2.

In the Mundell-Fleming model, the domestic interest rate is determined by the:

A.

intersection of the LM and IS curves.

B.

domestic rate of inflation.

C.

world rate of inflation.

D.

world interest rate.



3.

In a small open economy, net exports depend ______ on the exchange rate, where the exchange rate is defined as the amount of ______ currency per unit of ______ currency.

A.

negatively; foreign; domestic

B.

negatively; domestic; foreign

C.

positively; domestic; foreign

D.

positively; foreign; domestic



4.

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM* curve:

A.

slopes upward and to the right because at a higher income a higher interest rate is needed to increase velocity.

B.

is vertical because monetary velocity is independent of the interest rate.

C.

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

D.

slopes upward and to the right because a higher exchange rate leads to a higher income.



5.

In the Mundell-Fleming model, the exogenous variables are the:

A.

world interest rate, the price level, and the exchange rate.

B.

level of government spending, taxes, and income.

C.

exchange rate and level of income.

D.

price level, world interest rate, monetary policy, and fiscal policy.



6.

Under a floating system, the exchange rate:

A.

fluctuates in response to changing economic conditions.

B.

is maintained at a predetermined level by the central bank.

C.

is changed at regular intervals by the central bank.

D.

fluctuates in response to changes in the price of gold.



7.

In a small, open economy with a floating exchange rate, the exchange rate will appreciate if:

A.

the money supply is increased.

B.

the money supply is decreased.

C.

government spending is decreased.

D.

taxes are decreased.



8.

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

A.

income and the exchange rate will both rise.

B.

the exchange rate will rise, but income will remain unchanged.

C.

income will rise, but the exchange rate will remain unchanged.

D.

both income and the interest rate will rise.



9.

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

A.

income falls and the exchange rate rises.

B.

the exchange rate falls and income rises.

C.

income remains unchanged but the exchange rate rises.

D.

the exchange rate remains unchanged but income falls.



10.

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS* curve shifts to the right, raising the exchange rate:

A.

but not raising net exports or income.

B.

and net exports but not income.

C.

and income but not net exports.

D.

net exports and income.



11.

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

A.

buy foreign currency.

B.

sell foreign currency from reserves.

C.

raise taxes.

D.

decrease government spending.



12.

If there is a fixed-exchange-rate system, then in the short run described by the Mundell-Fleming model:

A.

the nominal exchange rate is fixed, but the real exchange rate is free to vary.

B.

the real exchange rate is fixed, but the nominal exchange rate is free to vary.

C.

both the nominal and real exchange rates are fixed.

D.

the nominal exchange rate is fixed, but whether the real exchange rate is fixed depends on whether the central bank follows a rule of constant growth of the money supply.



13.

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

A.

the exchange rate rises but income does not rise.

B.

income rises but the exchange rate does not rise.

C.

both income and the exchange rate rise.

D.

neither income nor the exchange rate rises, as the money supply contracts.



14.

In a small open economy with a fixed exchange rate, if the central bank tries to increase the money supply, then in the new short-run equilibrium:

A.

income rises.

B.

income falls.

C.

the exchange rate falls.

D.

income remains constant.



15.

According to the Mundell-Fleming model, under floating exchange rates a fiscal expansion:

A.

lowers the exchange rate, but a monetary expansion raises it.

B.

raises the exchange rate, but a monetary expansion or an import restriction lowers it.

C.

or an import restriction lowers the exchange rate, but a monetary expansion raises it.

D.

or an import restriction raises the exchange rate, but a monetary expansion lowers it.



16.

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes net exports to ______ and expansionary monetary policy causes net exports to ______.

A.

increase; increase

B.

increase; decrease

C.

decrease; decrease

D.

decrease; increase



17.

In the Mundell-Fleming model, if political turmoil raises the risk premium in a country's interest rate, then the exchange rate will ______.

A.

increase

B.

decrease

C.

remain constant

D.

either increase or decrease, depending on whether the IS* or LM* curve shifts more.



18.

According to the Mundell-Fleming model with floating exchange rates, political uncertainty in Mexico in 1994 caused the risk premium on Mexican interest rates to ______ and the Mexican exchange rate to ______.

A.

increase; increase

B.

increase; decrease

C.

decrease; increase

D.

decrease; decrease



19.

One argument favoring a fixed-exchange-rate system is that it:

A.

allows monetary policy to be used for stabilizing output and prices.

B.

reduces exchange-rate uncertainty, thereby promoting more international trade.

C.

leads to excessive growth of the money supply.

D.

requires no actions on the part of the central bank to implement.



20.

A speculative attack on a currency occurs when:

A.

a central bank switches from a floating to a fixed exchange rate.

B.

investors' perceptions change making a fixed exchange rate untenable.

C.

a country accepts dollarization.

D.

a central bank adopts a currency board to back the domestic currency with a foreign currency.



21.

An arrangement by which a central bank holds enough foreign currency to back each unit of the domestic currency is called a:

A.

floating exchange rate.

B.

dollarization.

C.

monetization.

D.

currency board.



22.

In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level will fall, the exchange rate will ______, and net exports will ______ to restore the economy to its natural rate.

A.

appreciate; increase

B.

appreciate; decrease

C.

depreciate; increase

D.

depreciate; decrease



23.

In a short-run model of a large open economy, after net capital outflow is substituted for net exports in the IS curve:

A.

the larger the absolute value of the responsiveness of net capital outflow with respect to the interest rate, the flatter the IS curve.

B.

the larger the absolute value of the responsiveness of net capital outflow with respect to the interest rate, the steeper the IS curve.

C.

if both domestic investment and net capital outflow are very responsive to the interest rate, they will tend to cancel each other out.

D.

the slope of the IS curve depends only on the interest responsiveness of investment and the marginal propensity to consume.



24.

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 fixed exchange rates, lead to:

A.

a fall in consumption and income.

B.

no change in consumption or income.

C.

no change in income but a rise in net exports.

D.

a fall in income but a rise in net exports.



25.

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:

A.

and net exports both to fall.

B.

to rise and net exports to fall.

C.

to fall and net exports to rise.

D.

and net exports both to rise.



26.

If investors in a large open economy become more willing to substitute foreign and domestic assets, then this will make the net capital outflow function:

A.

steeper, and the slope of the IS curve steeper.

B.

steeper, and the slope of the IS curve flatter.

C.

flatter, and the slope of the IS curve steeper.

D.

flatter, and the slope of the IS curve flatter.




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