Suppose that a small open economy is in equilibrium and that the government is analyzing the benefits and problems that can arise from implementing a fixed-exchange-rate regime. Use the Mundell-Fleming model to describe how this small open economy would react to a decrease in government spending under a flexible exchange-rate regime. Illustrate graphically.

a. the equilibrium e will increase but Y will remain the same

b. the equilibrium e will decrease but Y will remain the same

c. the equilibrium e and Y will increase

d. the equilibrium e and Y will decrease

Use now the Mundell-Fleming model to describe how this small open economy would react to a decrease in government spending under a fixed-exchange-rate regime. What is the main difference between these alternatives regimes? Illustrate graphically.

a. the equilibrium e will remain the same but Y increases

b. the equilibrium e will remain the same but Y decreases

c. the equilibrium e and Y will increase

d. the equilibrium e and Y will decrease

3.

Use the Mundell-Fleming model to describe how this small open economy would react to a decrease in the money supply under a flexible exchange-rate regime. Illustrate graphically.

a. the equilibrium e will decrease but Y will increase

b. the equilibrium e will increase but Y will decrease

c. the equilibrium e and Y will increase

d. the equilibrium e and Y will decrease

4 Use the Mundell-Fleming model to describe how this small open economy would react to a decrease in the money supply under a fixed-exchange-rate regime. What is the main difference? Illustrate graphically.

a. the equilibrium e will remain the same but Y will decrease

b. the equilibrium e will remain the same but Y will increase

c. the equilibrium e and Y will stay the same

d. the equilibrium e and Y will decrease

5. Suppose that a small open economy starts at a long-run equilibrium. Now assume that a new president gets elected to office and he brings to the government the best 5 economists of the country. At the same time, the economy started to grow at a rate above average and is projected to continue growing at such a rate for the next 5 years. All these events cause the risk premium of this country to go down. Use the Mundell-Fleming model to illustrate graphically the impact of this more favorable risk premium in the short run. Be sure to start from the Keynesian Cross and the Market for Money your analysis, and to label the axes, the curves, the initial equilibrium values, the direction the curve shift and when they do shift, and the short-run equilibrium values. State in words what happens to the nominal exchange rate and output in the short run.

a. the equilibrium e will increase but Y will remain the same

b. the equilibrium e will decrease but Y will remain the same

c. the equilibrium e and Y will increase

d. the equilibrium e will increase and Y will decrease