Economic Stabilization in Open Economy: Q&A Week 18

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In a fixed exchange rate regime, how does an expansionary monetary policy affect the money supply?

The central bank does not intervene, and the money supply remains unchanged.

The central bank increases the money supply, which leads to a depreciation of the domestic currency.

The central bank increases the money supply to avoid a depreciation of the domestic currency.

The central bank decreases the money supply to avoid a depreciation of the domestic currency. (correct)

According to the Mundell-Fleming model, what is the effect of an increase in exogenous aggregate demand (Ā) on output (Y) in a fixed exchange rate regime?

Y decreases because the central bank raises interest rates to defend the fixed exchange rate.

Y increases due to the rise in Ā and C, and the increase is amplified by an increase in net exports (NX).

Y increases due to the rise in Ā and C, but the increase is mitigated by a decline in net exports (NX). (correct)

Y remains unchanged because the central bank offsets the increase in Ā through contractionary monetary policy.

How does an expansionary monetary policy affect the exchange rate in a floating exchange rate regime according to the Mundell-Fleming model?

The exchange rate appreciates, which shifts the IS curve to the left.

The exchange rate remains unchanged because the central bank intervenes to stabilize it.

The exchange rate depreciates, which shifts the IS curve to the right. (correct)

The exchange rate depreciates, which shifts the LM curve to the right.

What is the effect of an increase in the exogenous component of aggregate demand (Ā) on the money market equilibrium in the Mundell-Fleming model?

The LM curve shifts to the right, increasing the equilibrium level of output (Y). Signup and view all the answers

How does an increase in the money supply affect the interest rate in the IS-LM model?

The interest rate decreases, shifting the LM curve to the right. Signup and view all the answers

In the Mundell-Fleming model, how does an expansionary monetary policy affect net exports (NX) in a fixed exchange rate regime?

NX decreases, as the central bank sells foreign currency to maintain the fixed exchange rate. Signup and view all the answers

What is the Mundell-Fleming model an extension of?

IS-LM model Signup and view all the answers

In the context of the text, what happens to net exports when the pound sterling depreciates?

Net exports increase Signup and view all the answers

How does a rise in the pound sterling affect domestic goods and foreign goods?

Domestic goods become more expensive, foreign goods become cheaper Signup and view all the answers

What is the condition under which a depreciation in the pound sterling increases net exports?

β + α > 1 Signup and view all the answers

What is included in the Balance of Payments (BoP) according to the text?

Sum of net exports and capital inflows Signup and view all the answers

What role does the Marshall-Lerner condition play in a floating exchange rate regime?

Keeping the BoP in equilibrium through changes in the exchange rate (e) Signup and view all the answers

In a fixed exchange rate regime, which of the following is considered an exogenous variable?

Money supply (M) Signup and view all the answers

According to the Mundell-Fleming model, an increase in government spending (d > 0) in a fixed exchange rate regime will lead to:

An increase in domestic output (dY > 0) Signup and view all the answers

What is the impact of an increase in the money supply (dM > 0) on the domestic interest rate (r) in a fixed exchange rate regime?

The interest rate will remain unchanged (dr = 0) Signup and view all the answers

In the Mundell-Fleming model, which of the following statements about the aggregate demand (AD) curve is correct?

The AD curve is perfectly elastic to the interest rate Signup and view all the answers

What is the relationship between the money market equilibrium (MME) and the goods market equilibrium (GME) in a fixed exchange rate regime?

The MME and GME are simultaneously determined Signup and view all the answers

What is the impact of an increase in government spending (d > 0) on the money supply (M) in a fixed exchange rate regime?

The money supply remains unchanged (dM = 0) Signup and view all the answers