By committing to a particular exchange rate a country

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Unformatted text preview: its interest rate, and they must match movements in the foreign interest rate risking unwanted effects on its own activity. Although the country retains control of fiscal policy, one policy instrument is not enough. A country that wants to decrease its budget deficit cannot, under fixed exchange rates, use monetary policy to offset the contractionary effect of its fiscal policy on output. KEY TERMS demand for domestic goods domestic demand for goods coordination, G-7 Marshall-Lerner condition J-curve Mundell-Fleming model sudden stops peg crawling peg European Monetary System (EMS) bands central parity euro supply siders twin deficits 17 REFRESH (TRUE, FALSE, OR UNCERTAIN) 1. The national income identity implies that budget deficits cause trade deficits. false 2. A fiscal expansion tends to increase net export. false 3. Fiscal policy has a greater effect on output in an economy with fixed exchange rates than in an economy with flexible exchange rates. true monetary accomodation 4. Other things being equal, the interest parity condition implies that the domestic currency will appreciate in response to an increase in the expected exchange rate. true 18 REFRESH 5. If financial investors expect the dollar to depreciate against the yen over the coming year, one-year interest rates will be higher in the US than in Japan. true 6. UIP If the Japanese interest rate is equal to zero, foreigners will not want to hold Japanese bonds. uncertain 7. Under fixed exchange rates, the money stock must be constant. false 19...
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This note was uploaded on 03/05/2014 for the course ECON 2123 taught by Professor Yanyu during the Fall '13 term at HKUST.

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