quiz 4 pt2

Question 1

When income rises in a small open economy (fiscal expansion), the IR tries to rise but….

This inflow causes an _____in the demand for the currency pushing up its value and thus making domestic goods more _________.

• appriciation:
  imporing _____; exporting ____

Answer 1

capital inflows from abroad put downward pressure on the IR

increase
expensive to foreigners

more; less

Question 2

When the increase in the MS puts downward pressure on the domestic IR, capital flows out as investors seek a higher return elsewhere…

The outflow also causes the exchange rate to _________, making domestic goods less expensive relative to
foreign goods, and stimulates NX.
- Hence, monetary policy influences the …

• depreciation:
  exporting ____; importing ______

Answer 2

The capital outflow prevents the IR from falling.

depreciate

e rather than r.

more; less

Question 3

define fixed exchange rate

Answer 3

pegging our $ to the us $

Question 4

fixed exchange rate, the central bank announces a value for the exchange rate and stands ready to …. to keep the exchange rate at its announced level.

Answer 4

buy and sell the domestic currency at a predetermined price

Question 5

Fixed exchange rates require the _______ to adjust to whatever level will ensure that the equilibrium exchange rate in the market for foreign- currency exchange EQUALS the …

Answer 5

money supply
announced exchange rate.

Question 6

this exchange-rate system fixes the
______ exchange rate.

Whether it fixes the real exchange rate depends on the _______

Answer 6

nominal
time horizon.

Question 7

A fiscal expansion shifts IS* to the right. To maintain the fixed exchange rate, the Fed must increase the
_____, thus increasing LM* to the ___.

Unlike the case with flexible exchange rates, there is no crowding out effect on NX due to a …

Answer 7

money supply; right

higher exchange rate.

Question 8

If the Fed tried to increase the money supply by buying bonds from the public, that would put ______ pressure on the IR.

Arbitragers respond by …., causing the money supply and the LM curve to ___ to their initial positions.

Answer 8

down-ward

selling the domestic currency to the central bank

contract

Question 9

2 advantages

Answer 9

risk tied to exchange rate fluctuations r minimized.

limited currecny specultation

Question 10

3 disadvantages

Answer 10

lack of flexibility in responding to changing market conditions

opportunity cost of reserves

fluctuating IR may conflict with policy objectives

Question 11

2 examples of trade policy

Answer 11

quotas
tariffs