macroeconomics c7

The LM curve shows a … relationship between the interest rate and output level

• Positive

• Negative

• Neutral

• 1. Ø

The Mundell-Fleming model assumes that:

• A. prices are flexible, whereas the IS-LM model assumes that prices are fixed.

• B. prices are fixed, whereas the IS-LM model assumes that prices are flexible

• C. as in the IS-LM model, prices are fixed

• D. as in the IS-LM model, prices are flexible

In the Mundell-Fleming model:

• A. the exchange rate system must have a floating exchange rate

• B. the exchange rate system must have a fixed exchange rate

• C. it makes no difference whether the exchange rate system has a floating or a fixed exchange rate

• D. the behavior of the economy depends on whether the exchange rate system has a floating or a fixed exchange rate.

In a small open economy, a decrease in its exchange rate will ______ net exports and shift the _____ curve.

• A. increase; IS

• B. decrease; IS

• C. increase; LM

• D. decrease; LM

The Mundell-Fleming framework studies (A) _____ , (B) _________ economies in a world with (C) _____ financial markets and (D) _____ capital mobility.

• a) (A) small; (B) open; (C) integrated; (D) free

• b) (A) large; (B) open; (C) integrated; (D) free

• c) (A) small; (B) mercantilist; (C) integrated; (D) free

• d) (A) large; (B) open; (C) restricted; (D) free

Assuming there is perfect capital mobility, compared to a large open economy, a small open economy is one in which the:

• A. exchange rate is fixed

• B. exchange rate is floating

• C. domestic interest rate equals the world interest rate

• D. domestic interest rate is not equal to the world interest rate.

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

1. 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

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 IS curve:

• A. slopes downward and to the right because the higher the exchange rate, the lower the level of net exports and, therefore, of short-run equilibrium income in the goods market

• B. is vertical because there is only one investment level that is consistent with the world interest rate

• C. is vertical because the exchange rate does not enter into the IS equation

• D. slopes downward and to the right because the higher the exchange rate, the higher the level of net exports and, therefore, of short-run equilibrium income in the goods market.

The intersection of the IS and LM curves shows the ______ and the ______ at which both the goods market and the money market are in equilibrium.

• A. interest rate; price level

• B. price level; exchange rate

• C. level of output; exchange rate

• D. level of output; price level