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11 Dec 2019

Consider a small open economy that currently operates under a floating exchange rate system. Suppose the central bank of the economy decides to decrease the money supply. Using the Mundell-Fleming model, show the short run effect this has on the economy.

Use a table to compare the results of a decrease in money supply on domestic interest rate, equilibrium level of income and exchange rate in the Mundell-Fleming model with a floating exchange rate with the IS-LM model.

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Related questions

Consider a standard, small, open economy of the sort specified in the Mundell-Fleming model of chapter 13. Suppose the monetary authority increases the money supply in order to increase income. In which exchange-rate regime is this expansionary monetary policy effective: a floating-exchange-rate regime or a fixed-exchange-rate regime? Please defend your reasoning.

Typed answers only,  please

Assume an economy that is in a long-run equilibrium. So output is at full-employment level. Suppose money supply M is 250, price level P is 100, exchange rate E is 10. Then for one reason or another, the central bank decides to increase M to 500 and keep M at that level permanently.

(1)What happens with the interest rate R and exchange E in the short run?

Assume an economy that is in a long-run equilibrium. So output is at full-employment level. Suppose money supply M is 250, price level P is 100, exchange rate E is 10. Then for one reason or another, the central bank announces to temporarily increase M to 500, to keep M at that level for three months and after these three months to reduce M to 250 and to keep M at that level permanently.
(2) What happens with the interest rate R and exchange E in the short run?

A. In a small open economy in a flexible exchange rate system with perfect capital mobility, there is complete ________ crowding-out of ________ policy.

a) domestic, monetary

b) domestic, fiscal

c) international, fiscal

d) international, monetary

B. If the dollar depreciates against the yen, this tends to ________ our imports of Japanese goods and ________ our exports of goods to Japan, so that our net exports ________.

a) decrease, decrease, decrease

b) increase, decrease, are unchanged

c) decrease, increase, increase

d) decrease, increase, are unchanged

E) increase, increase, increase

C. An increase in the nominal money supply will shift

a) AD up and raise the price level.

b) SAS down and lower the price level.

c) SAS up and raise the price level.

d) AD down and lower the price level.

D. A rise in the price level causes

a) movement down along an LM curve.

b) movement up along an LM curve.

c) the LM curve to shift downward.

d) the LM curve to shift upward.

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