Question

In an IS-LM model with fixed exchange rates and perfect capital mobility, a cut in government spending shifts the IS-curve to the left

Select one:
a. but then the central bank is forced to restrict the money supply, so the LM-curve also shifts to the left
b. but then back to the right again because of the resulting increase in net exports
c. but then the central bank is forced to expand money supply, so the LM-curve shifts to the right
d. without affecting the LM-curve
e. but then a capital inflow from abroad results, forcing the government to reverse its policy

If capital is perfectly mobile internationally, then

Select one:
a. significant differences in interest rates across countries can persist over a long time
b. one country's interest rates can be substantially higher than the world interest rate over the long run
c. an increase in U.S. interest rates will worsen the U.S. balance of payments since U.S. banks are more willing to lend internationally
d. countries with interest rates much lower than in the rest of the world will experience an outflow of capital
e. countries with interest rates higher than in the rest of the world will experience an outflow of capital

Contractionary monetary policy in the U.S.

Select one:
a. raises U.S. interest rates and lowers U.S. GDP
b. decreases the value of the dollar relative to other currencies
c. increases U.S. net exports
d. raises U.S. interest rates and raises U.S. GDP
e. decreases U.S. interest rates and lowers U.S. GDP

A beggar-thy-neighbor policy is a policy that

Select one:
a. is intended to appreciate a country's currency and stimulate demand for foreign goods
b. combines export subsidies with cuts in corporate income taxes
c. uses fiscal expansion in an effort to increase net exports, output, and employment
d. creates domestic employment at the expense of other countries
e. uses monetary restriction to raise interest rates in an effort to attract foreign capital

If a country has a balance-of-payments surplus, we know for sure that

Select one:
a. the sum of the current and capital accounts shows a surplus
b. net exports are positive
c. the current account shows a surplus
d. the capital account shows a surplus
e. the sum of the current and capital accounts shows a deficit

Which of the following is FALSE?

Select one:
a. a rise in foreign income always improves a country’s trade balance and leads to an increase in aggregate demand
b. a decrease in exports leads to lower interest rates and a currency depreciation
c. an increase in domestic income worsens a country's trade balance since it increases spending on imports
d. a rise in domestic interest rates improves a country's trade balance since it decreases imports
e. an exchange rate depreciation improves a country’s trade balance and thus increases aggregate demand

If the real exchange rate is equal to 1,

Select one:
a. the relative demand for domestically produced goods will rise
b. net exports is equal to zero
c. foreign investors will try to buy more domestic assets
d. the relative demand for domestically produced goods will fall
e. currencies are at purchasing power parity

In which exchange rate system do central banks always stand ready to buy and sell their currency at a predetermined price?

Select one:
a. a fixed exchange rate system
b. a dirty floating exchange rate system
c. a flexible exchange rate system
d. a floating exchange rate system
e. a managed exchange rate system

Assume the Japanese yen has appreciated relative to the U.S. dollar. Which of the following is true?

Select one:
a. each yen can now buy more dollars
b. each dollar can now buy more yen
c. the Japanese central bank is forced to buy pounds.
d. the Japanese central bank is forced to sell dollars
e. each dollar can now buy more Japanese goods

Our country’s net exports will increase if

Select one:
a. there is an increase in domestic income
b. domestic interest rates rise due to expansionary fiscal policy
c. many of our trade partners experience inflation
d. there is an increase in domestic inflation
e. there is a decrease in the real exchange rate

In an IS-LM model with flexible exchange rates and perfect capital mobility, a restriction in money supply will

Select one:
a. decrease both the level of output and the interest rate but only temporarily
b. shift the IS-curve first to the right and then back to the left as the central bank is forced to buy foreign currency reserves
c. shift the LM-curve first to the left and then back to the right as the central bank is forced to buy foreign currency reserves
d. decrease the level of output permanently but increase the interest rate only temporarily
e. temporarily decrease the level of output and temporarily increase the interest rate

If exchange rates are determined in the foreign exchange market, they are never

Select one:
a. flexible
b. managed
c. floating
d. influenced by actions of the central bank
e. fixed

If the exchange rate is above the equilibrium level then in a floating exchange rate system:

Select one:
a. There is excess demand and the exchange rate should fall
b. There is excess supply and the exchange rate should rise
c. There is excess demand and the exchange rate should rise
d. There is excess supply and the exchange rate should fall
e. There is excess demand and the exchange rate should be constant

Answer 1

In IS-LM model under fixed exchange rate and full capital mobility if government expenditure decreases and due to this IS curve will shift leftward -

ans.(a) But then central bank forced to restrict money supply and for that LM curve also shifts left.

It happens because when IS curve shifts left then interest rate declines and it causes capital outflow. Due to capital outflow depreciation of exchange rate occurs and to keep the exchange rate at previous level central bank cut money supply which causes LM curve to shift leftward.

If capital is perfectly mobile internationally then - ans. (d) countries with lower interest rate will face capital outflow. It is because the investor will withdraw the capital and will invest in rest of the world where interest rate is comparatively higher.

Contractionary monetary policy in US - ans.(a) raises US interest and lowers US GDP. It is because due to contractionary monetary policy LM curve shift left and to maintain the balance of payment IS curve also shifts left and as a result US GDP also fall.

A beggar thy neighbour policy is that - ans. (b). combines export subsidy with corporate tax cut. This policy actually hampers the other country and will benefit the home country.

If a country has balance of payment surplus then for sure that - ans. ( b). net exports are positive. Balance of payment surplus means there will be definite exports more than import.