Open Economy

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.

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.

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.

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

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

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

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.

The balance of payments schedule can be expressed as

• 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

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.

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