worsen the balance on the capital account but improve the trade balance.

worsen the trade balance but improve the balance on the capital account.

worsen both the trade balance and the balance on the capital account

improve both the trade balance and the balance on the capital account.

a. there is no capital mobility and exchange rates are allowed to float.

b. there is capital mobility.

c. exchange rates are allowed to float

d. the country has a balance of payments surplus.

both c and d.

monetary policy is ineffective while fiscal policy is highly effective

fiscal policy is completely ineffective while monetary policy is highly effective

both monetary policy and fiscal policy are effective.

monetary policy is less effective than fiscal policy.

monetary policy.

the IS and LM curves.

domestic savings and investment.

budget deficits

none of the above

LM schedule to the left.

BP schedule to the right.

BP schedule to the left.

IS schedule to the right

a. Risks due to exchange rate changes

b. Differential risk on the assets of different countries

c. Technological progress, which improves the quality of information on foreign assets

both a and b.

All of the above

a closed economy

the Mundell-Flemming model with perfect capital mobility.

the Mundell-Flemming model with perfect capital mobility and flexible exchange rates.

the Mundell-Flemming model with perfect capital mobility and fixed exchange rates.

none of the above.

X(Y^ƒ, π) − Z(Y, π) − F(r − r^ƒ) = 0

X(Y^ƒ + π) + Z(Y, π) − F(r − r^ƒ) = 0

X(Y^ƒ, π) − Z(Y, π) + F(r − r^ƒ) = 0

X(Y^ƒ, π) + Z(Y, π) + F(r − r^ƒ) = 0

reduces interest rates .

increases income

decreases the trade balance.

increases capital inflows.

a. a new closed-economy model.

b. implicitly assumes a fixed domestic price level.

c. is an open-economy version of the IS-LM model.

both b and c

results in a balance of payments surplus without a conflict between domestic goals and external balance

results in a balance of payments deficit with a potential conflict between domestic goals and external balance

will shift the LM curve to the left.

will have no effect on the balance of payments.

the intersection of the IS and LM curves determine the equilibrium exchange rate

the BP curves position is determined by the exchange rate.

the policy choice between fixed and floating exchange rates shifts the BP curve.

the extent of capital mobility determines the slope of the BP curve.

balancing a country’s current account.

maintaining monetary policy independence.

fixing an exchange rate

maintaining a balanced government budget.

increase; increase

increase; remain unchanged

increase; decrease

remain unchanged; increase

increase interest rates

increase income.

increase the IS curve

increase inflation.