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econ 410 hw5

# econ 410 hw5 - Homework 5(Chapters 11 and 12(ECON 410...

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Page 1 Homework 5 (Chapters 11 and 12) (ECON 410, Spring 2011) (Due Thursday 4/21/2011, in class) (A) Multiple Choice Questions: (3 points per multiple choice problem), 25 questions. 1. In a small open economy with floating exchange rate, the government can reduce trade deficit by: A) Prohibiting imports of a certain good. B) Cut government budget deficit. C) Encourage consumers to buy domestically produced goods. D) Cut income taxes. 2. During the Great Depression, taxes are raised because of the concerns of the budget deficit. This action would mostly lead to: A) IS curve shifted right. B) LM curve shifted right. C) IS curve shifted left. D) LM curves shifted left. 3. According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to ______ and in an economy with fixed exchange rates import restrictions cause net exports to ______. A) increase; increase B) increase; remain unchanged C) remain unchanged; remain unchanged D) remain unchanged; increase 4. In the Mundell-Fleming model, expectations that a currency will lose value in the future will cause the current exchange rate to: A) increase in the present. B) decrease in the present. C) remain constant in the present. D) decrease only in the future. 5. The Mundell-Fleming model assumes that: A) prices are flexible, whereas the IS-LM model assumes that prices are fixed. B) prices are fixed, whereas the IS-LM model assumes that prices are flexible. C) as in the IS-LM model, prices are fixed. D) as in the IS-LM model, prices are flexible.

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Page 2 6. If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM * curve: A) slopes upward and to the right because at a higher income a higher interest rate is needed to increase velocity. B) is vertical because monetary velocity is independent of the interest rate. C) is vertical because the exchange rate does not enter into the LM * equation. D) slopes upward and to the right because a higher exchange rate leads to a higher income. 7. Right now, a momentum is building to cut government spending to reduce budget deficit.
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econ 410 hw5 - Homework 5(Chapters 11 and 12(ECON 410...

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