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Unformatted text preview: ECON 101B: Section 17 Handout Date: 03/15/2011 Question 1 Use the Mundell-Fleming model to predict what would happen to aggregate income, the exchange rate, and the trade balance under both floating and fixed exchange rates in response to each of the following shocks. 1. A fall in consumer confidence about the future induces consumers to spend less and save more. 2. The introduction of the stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars. 3. The introduction of ATMs reduces the demand for money. Question 2 A small open economy with a floating exchange rate is in recession with a balanced trade. If policymakers want to reach full employment while maintaining balanced trade, what combination of monetary and fiscal policy should they choose? Question 3 The Mundell-Fleming model takes the world interest rate r * as an exogenous variable. Let’s consider what happens when this variable changes....
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This note was uploaded on 10/04/2011 for the course ECON 101b taught by Professor Staff during the Spring '08 term at University of California, Berkeley.
- Spring '08