14. A) B) D) . In the short-run model of a small open economy, net exports depend on the exchange rate, where the exchange rate 1s defined as the amount of currency per unit of currency. negatively; foreign; domestic negatively; domestic; foreign positively; domestic; foreign positively; foreign; domestic If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the nominal exchange rate e along the vertical axis, then the IS* curve: slopes downward and to the right because the higher the exchange rate, the higher the level of net exports and, therefore, the higher the level of income that equilibrates the goods market. is vertical because there is only one investment level that is consistent with the world interest rate. is vertical because the exchange rate does not enter into the IS* equation. slopes downward and to the right because the higher the exchange rate, the lower the level of net exports, and therefore, the lower the level of income that equilibrates the goods market. Professor Fanny Demers 5 March 31, 2024 15. In a small open economy with a floating exchange rate, an effective policy to decrease equilibrium output is to: A) decrease government spending. B) decrease taxes. C) increase the money supply. D) decrease the money supply. 16. In a small open economy with a floating exchange rate, the nominal exchange rate will appreciate if A) the money supply is increased B) the government decreases tariffs on imports. C) taxes fall D) government spending falls; 17. A) ) D) 18. In the Mundell-Fleming model of a small open economy with a floating exchange rate, a rise in government spending: partially crowds out private investment, so that there is a small increase in output. fully crowds out private investment so that output does not change. attracts foreign capital inflows, thus raising the exchange rate. As a result, net exports fall, but not by enough to offset the impact of the new government spending, so that there is a small increase in output. attracts foreign capital inflows, thus raising the exchange rate. As a result, net exports fall by an amount exactly equal to the increase in government spending so that output does not change. The trilemma refers to the fact that it is impossible for a country to simultaneously have: A) low inflation, low unemployment, and a rapid rate of GDP growth. B) free capital flows, a fixed exchange rate, and an independent monetary policy. C) high interest rates, a budget deficit, and a trade deficit. D) an expansionary fiscal policy, a contractionary monetary policy, and a flexible exchange rate. 19. 20. Dollarization refers to A) the fact that the US uses the dollar to carry out all of its international transactions B) a stricter form of fixed exchange rates where the domestic economy uses a hard currency like the US dollar instead of its domestic currency C) the fact that the value of the US dollar is set by the Federal Reserve (the CB of the US.) D) the fact that net capital outflows in Canada are measured in US dollar terms. Consider the fact that the domestic price index (like the CPI) is a function of both the price of domestic goods and of the price of imports in domestic currency terms, P/e. Then, under this modified version of the Mundell- Fleming model under floating exchange rates, A) the LM* curve becomes horizontal instead of vertical in the Y-e plane B) the IS* curve becomes vertical in the Y-e plane because it is no longer a function of the exchange rate. C) Net exports are no longer a function of the real exchange rate D) the LM* curve becomes a function of the exchange rate and is upward sloping