(1) In a system of perfectly flexible exchange rates, an expansionary U.S. monet
ID: 1098891 • Letter: #
Question
(1) In a system of perfectly flexible exchange rates, an expansionary U.S. monetary policy will
cause (assuming other things equal):
A) a fall in the value of the dollar relative to foreign currencies. B) a change in the value of the dollar relative to foreign currencies but the direction of the change is uncertain. C) no change in the value of the dollar relative to foreign currencies. D) a rise in the value of the dollar relative to foreign currencies.
(2) Capital account inflows (credits) in the US balance of payments accounts include:
A) purchases of U.S. government bonds by foreigners. B) purchases of financial assets by U.S. residents. C) purchases of foreign assets by US residents. D) purchases of US products by foreigners.
(3) In a small open economy with perfect capital mobility, if domestic interest rates are above
world interest rates then:
A) the central bank will have to intervene even if exchange rates are flexible. B) current account deficits will drive domestic interest rates down. C) capital outflows will drive domestic interest rates down. D) capital inflows will drive domestic interest rates down.
(4) Assume perfect capital mobility. In the Mundell-Fleming model under a fixed exchange rate
system, expansionary fiscal policy causes output to _____, while under flexible exchange
rates expansionary fiscal policy causes output to _____.
A) increase; decrease B) increase; increase C) increase; remain unchanged D) remain unchanged; increase
(5) Suppose that interest rates on both US and Brazilian bonds are 8%. Now suppose that the Fed
lowers US interest rates to 2%. All other things equal, we would expect demand for Brazilian
bonds to ______ relative to demand for US bonds and thus the Brazilian real to ______ relative to
the US dollar:
A) increase; appreciate B) decrease; depreciate C) increase; depreciate D) remain unchanged, depreciate
Explanation / Answer
(1) A) a fall in the value of the dollar relative to foreign currencies
(2) A) purchases of U.S. government bonds by foreigners
(3) D) capital inflows will drive domestic interest rates down
(4) B) increase; increase
(5) A) increase; appreciate
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