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- 1. Multiple Choice
Within a fixed exchange rate system, the effect of an expansionary fiscal policy action on the balance of payments will be to
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.
- 2. Multiple Choice
A fall in the demand for U.S. exports would result in a rise in the exchange rate when
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.
- 3. Multiple Choice
Assuming perfect capital mobility and flexible exchange rates, then
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.
- 4. Multiple Choice
In the Mundell-Fleming model with perfect capital mobility, the domestic interest rates are determined by
monetary policy.
the IS and LM curves.
domestic savings and investment.
budget deficits
none of the above
- 5. Multiple Choice
Assume perfect capital mobility and a fixed exchange rate system. Then, an increase in government spending would shift the
LM schedule to the left.
BP schedule to the right.
BP schedule to the left.
IS schedule to the right
- 6. Multiple Choice
Which of the following factors might make capital mobility less than perfect?
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
- 7. Multiple Choice
Empirically, there is a close positive relationship between domestic savings and investment. This is consistent with what we should expect to observe in
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.
- 8. Multiple Choice
The balance of payments schedule can be expressed as
X(Yƒ, π) − Z(Y, π) − F(r − rƒ) = 0
X(Yƒ + π) + Z(Y, π) − F(r − rƒ) = 0
X(Yƒ, π) − Z(Y, π) + F(r − rƒ) = 0
X(Yƒ, π) + Z(Y, π) + F(r − rƒ) = 0
- 9. Multiple Choice
In the Mundell-Fleming model, regardless of whether the economy has perfect capital mobility or not, an increase in the money supply
reduces interest rates .
increases income
decreases the trade balance.
increases capital inflows.
- 10. Multiple Choice
Which of the following statements is (are) correct? The Mundell-Fleming model is
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
- 11. Multiple Choice
Assuming imperfect capital mobility and a fixed exchange rate, then an expansionary monetary policy
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.
- 12. Multiple Choice
In the Mundell-Fleming model, all of the following are true EXCEPT:
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.
- 13. Multiple Choice
Dollarization by a foreign country is another form of:
balancing a country’s current account.
maintaining monetary policy independence.
fixing an exchange rate
maintaining a balanced government budget.
- 14. Multiple Choice
Assume perfect capital mobility. Under a fixed exchange rate system, expansionary fiscal policy causes income to _____, while under flexible exchange rates expansionary fiscal policy causes income to _____.
increase; increase
increase; remain unchanged
increase; decrease
remain unchanged; increase
- 15. Multiple Choice
In the Mundell-Fleming model with a floating exchange rate and perfect capital mobility, an increase in the money supply does all of the following EXCEPT:
increase interest rates
increase income.
increase the IS curve
increase inflation.
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