Lesson 9 and 10

What does the Mundell-Fleming model primarily analyze?

• Closed economy monetary policy

• Open economy with trade and capital flows

• Inflation targeting in a closed economy

• Fiscal policy effectiveness only

In the Mundell-Fleming model, what key assumption is made about capital mobility?

• Capital is immobile internationally

• Perfect capital mobility exists

• Capital mobility is restricted by tariffs

• Capital moves only within domestic borders

In an open economy, aggregate demand (AD) includes which of the following components?

• C + I + G

• C + I + G + (X - M)

• C + G + NX only

• I + G only

According to the Mundell-Fleming model, investment depends negatively on:

• The real interest rate

• The nominal exchange rate

• Government spending

• Disposable income

What does the uncovered interest parity (UIP) condition state?

• Domestic interest rates are always higher than foreign rates

• Exchange rates are fixed by the government

• Domestic and foreign assets offer the same expected return when measured in the same currency

• Capital flows are restricted

Under floating exchange rates, which policy is generally more effective in influencing output?

• Wage policy

• Trade policy

• Fiscal policy

• Monetary policy

What happens to the exchange rate after an expansionary fiscal policy in a small open economy with floating exchange rates?

• It depreciates

• It remains unchanged

• It appreciates

• It fluctuates unpredictably

Why does fiscal policy fail to increase output under floating exchange rates with perfect capital mobility?

• Government spending is ineffective

• Monetary policy offsets the effect

• Crowding out of private investment

• The exchange rate appreciates, reducing net exports

What is the effect of expansionary monetary policy on exchange rates under floating exchange rate regimes?

• Exchange rate depreciates

• Exchange rate appreciates

• No effect on exchange rates

• Exchange rate becomes fixed

Under fixed exchange rates, the central bank maintains the exchange rate by:

• Allowing market forces to set the exchange rate

• Adjusting fiscal policy only

• Buying and selling foreign reserves

• Ignoring capital flows