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1 | |
In the Mundell-Fleming diagram, a point to the right of the IB but to the left of the EB curve indicates a situation in which the economy has unacceptably |
| | A) | rapid inflation and a balance of payments surplus. |
| | B) | rapid inflation and a balance of payments deficit. |
| | C) | high unemployment and a balance of payments surplus. |
| | D) | high unemployment and a balance of payments deficit. |
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2 | |
The set of combinations of the interest rate and income such that I + G + X = S + M + T is known as the |
| | A) | IS curve. |
| | B) | LM curve. |
| | C) | BP curve. |
| | D) | EB curve. |
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3 | |
Which of the following best explains the slope of the LM curve? |
| | A) | For money demand and money supply to continue to be equal, an increase in income must be matched by an increase in the interest rate. |
| | B) | Consumption decreases as income increases. |
| | C) | Investment and the interest rate are inversely related. |
| | D) | All of the above. |
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4 | |
A point to the right of the IS curve is associated with __________; the situation will lead to __________. |
| | A) | unintended inventory depletion; an increase in income and/or the interest rate |
| | B) | unintended inventory depletion; a decrease in income and/or the interest rate |
| | C) | unintended inventory accumulation; an increase in income and/or the interest rate |
| | D) | unintended inventory accumulation; a decrease in income and/or the interest rate |
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5 | |
When short-term capital flows are not sensitive to changes in the domestic interest rate, |
| | A) | the IS curve slopes upward. |
| | B) | the BP curve is relatively flat. |
| | C) | the LM curve is vertical. |
| | D) | all of the above. |
| | E) | a and c only. |
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6 | |
The observation that short-term capital has become increasingly mobile internationally probably implies that the BP curve has become |
| | A) | flatter. |
| | B) | downward-sloping. |
| | C) | unimportant. |
| | D) | steeper. |
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7 | |
Suppose the leaders of the country of NorthTexasland decide that they need to cut government spending dramatically. Assuming NorthTexasland has a fixed exchange rate system, this change should lead to |
| | A) | a decrease in the domestic money supply if short-term capital is perfectly immobile, but an increase in the domestic money supply if short-term capital is perfectly mobile. |
| | B) | a decrease in the domestic money supply if short-term capital is perfectly immobile, and no change in the domestic money supply if short-term capital is perfectly mobile. |
| | C) | an increase in the domestic money supply if short-term capital is perfectly immobile, and no change in the domestic money supply if short-term capital is perfectly mobile. |
| | D) | an increase in the domestic money supply if short-term capital is perfectly immobile, but a decrease in the domestic money supply if short-term capital is perfectly mobile. |
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8 | |
Under a fixed exchange rate system, fiscal policy is most effective at changing the level of national income when |
| | A) | short-term capital is perfectly mobile. |
| | B) | short-term capital is perfectly immobile. |
| | C) | the BP curve is vertical. |
| | D) | b and c. |
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9 | |
A fixed exchange rate system causes monetary policy to be |
| | A) | completely ineffective. |
| | B) | somewhat effective. |
| | C) | very effective. |
| | D) | more effective than fiscal policy. |
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10 | |
When policy-makers decide to devalue the currency, |
| | A) | national income will rise if short-term capital is immobile but fall if short-term capital is mobile. |
| | B) | national income will fall if short-term capital is immobile but rise if short-term capital is mobile. |
| | C) | national income will fall whether short-term capital is immobile or mobile. |
| | D) | none of the above. |
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