1. Suppose the government in Country A is facing a slowdown. If the government wishes to revive the economy's output without affecting the trade balance, which of the following measure should be taken by the government?

A. An increase in government spending and reduction in foreign output.

B. A reduction in taxes and depreciation of .

C. A fiscal expansion and increase in .

D. An appreciation in real exchange rate.

2. For a country to successfully peg its exchange rate at a chosen value, financial investors must believe that the exchange rate is:

A. floating.

B. variable.

C. flexible.

D. fixed.

3. In an economy with fixed exchange rates that is performing near full output, ---- could become an issue that monetary policy would otherwise be able to address in an economy with flexible exchange rates by ---.

4. In an open economy with fixed (nominal) exchange rates, an increase in output, Y would require:

A. a higher real exchange rate.

B. higher foreign output.

C. lower government spending.

D. all of the above.

5. In a flexible exchange rate regime, domestic and foreign interest rates are in parity. The central bank decides to reduce the current domestic interest rate from 5.00% to 4.25% for one year. The current exchange rate (rounded to the nearest percent) then decreases to ---.