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Question 01

Assuming that both the price level and the interest rate are fixed for an open economy, if output were equal to Y´:

a) there is an excess supply of goods equal to YY´.

b) desired demand (Y´C) is lower than output (Y´B) and inventories of unsold good will accumulate.

c) desired demand (DD´) will shift vertically upward to pass through point B for goods market equilibrium.

d) the government budget will be in surplus and equal to BC.

Question 02
Assuming both the price level and the interest rate are fixed for an open economy and government spending increases from G to G´, the government spending multiplier is equal to:
a) the difference (Y-Y´)divided by the difference (DD´- DD)
b) the length of the segment BA divided by the difference (Y-Y´).
c) the difference (Y-Y´) divided by the difference (G´- G)
d) the slope of IS or IS´

Question 03
Assuming the price level is fixed in an open economy and output increases from Y to Y´, for the instant that the interest rate is still equal to i but output is equal to Y´:
a) there is an excess demand for money and this will result in an increase in the interest rate.
b) there will be additional saving from the increase in income that will ultimately cause the demand for money to return to its original level.
c) real money balances would increase to maintain equilibrium in the money market.
d) there will be an excess supply of real balances that can be used to finance the spending on increased output.

Question 04
Assume the price level is fixed in a small open economy under fixed exchange rates and the central bank increases the money supply. After adjustments are made, the economy is:
a) back at point A.
b) at point B, where both the domestic goods market and the domestic money market will be in equilibrium.
c) at point C, because the IS curve will shift to the right.
d) at point C, because fixed exchange rates require capital controls.

Question 05
The initial equilibrium in the goods and money market for a small open economy is at point A where IS and LM intersect with i*. World interest rates jump upward to i*´. The leftward shift in the LM curve to LM´ that would follow under (A) _________ is due to the central bank (B) _________ .
a) (A) fixed exchange rates ;(B) selling foreign exchange.
b) (A) fixed exchange rates ;(B) buying foreign exchange.
c) (A) flexible exchange rates ;(B) selling foreign exchange.
d) (A) flexible exchange rates ;(B) buying foreign exchange.

Question 06
Assume the price level is fixed in a small open economy under fixed exchange rates. First consider the policy mix of fiscal and monetary policies that move IS curve to IS´ and the LM curve to LM´, respectively. Suppose instead, the fiscal authorities simple shift the IS curve to IS´ without a coordinated shift of the LM curve. What will we observe in the second case?
a) Without support from the monetary authorities the new IS´ curve will be forced back to IS and the economy will return to A.
b) Without support from the monetary authorities the new IS´ curve will be forced partway back towards IS and the economy will move to a point between A and B.
c) The LM curve will be forced to LM´ anyway even without the policy mix and the economy will move to B just as in the policy mix case.
d) The LM curve will be forced to the right anyway even without the policy mix though the economy will only move to a point between A and B.

Question 07
The initial equilibrium in the goods and money market for a small open economy is at point A where IS and LM intersect with i*. World interest rates jump upward to i*´. The rightward shift in the IS curve to IS´ that would follow under (A) _________ is due to the (B) _________ .
a) (A) fixed exchange rates; (B) increase in government deficits due to higher interest rates
b) (A) fixed exchange rates; (B) lower demand for money due to high interest rates leading to an increased demand for consumption goods
c) (A) flexible exchange rates; (B) exchange rate depreciating
d) (A) flexible exchange rates; (B) exchange rate appreciating

Question 08
The initial equilibrium in the goods and money market for a small open economy with a fixed exchange is at point A where IS and LM intersect with i*. Suppose a devaluation of the currency takes place. The initial impact will be for (A) _________ because (B) _________ . Next, (C) _________ as (D) _________ .
a) (A) the IS curve to shift out to IS; (B) the real exchange rate will fall; (C) the LM curve will shift out to LM; ´(D) the central bank purchases foreign exchange
b) (A) the LM curve will shift out to LM; ´(B) the central bank purchases foreign exchange; (C) the IS curve to shift out to IS; (D) the real exchange rate will fall;
c) (A) the IS curve to shift out to IS; (B) the central bank purchases foreign exchange; (C) the LM curve will shift out to LM; ´(D) the real exchange rate will fall
d) (A) the LM curve will shift out to LM; ´(B) the real exchange rate will fall; (C) the IS curve to shift out to IS; (D) the central bank purchases foreign exchange;

Oxford University Press, Online Resource Centre, Chapter 10.

Chapter 10

Instructions

Question 01

Question 02

Question 03

Question 04

Question 05

Question 06

Question 07

Question 08