1.) The introduction of automatic teller machines, which reduces the demand for money, will,according to the Mundell–Fleming model with fixed exchange rates have no change in income or net exports.
True
False
2.) The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell–Fleming model with floating exchange rates, lead to a rise in both income and net exports.
True
False
3.) The IS curve shifts to the right when interest rates decreases thereby increasing GDP.
True
False
Part 1) Reduction in the demand for money due to the automatic teller machine is like an autonomous decline in the demand for money. This will shift the LM curve to the right leading to lower interest rate at each level of income. In a Mundell-Fleming Model, such a decline in the interest rate will cause capital outflow as investors will move to countries with comparatively higher interest rate. This will raise the demand for foreign currency and foreign investors will convert their holdings of domestic currency into foreign currency. This will put pressure on the exchange rate depreciate. However, there is fixed exchange rate regime so the Central Bank will intervene in the foreign exchange market and will buy domestic currency and will ensure that there is no depreciation of the domestic currency. As a result, there will be no change in income or net exports. So, the statement given is True.
Part 2) Reduction in the demand for money due to the automatic teller machine is like an autonomous decline in the demand for money. This will shift the LM curve to the right leading to lower interest rate at each level of income. In a Mundell-Fleming Model, such a decline in the interest rate will cause capital outflow as investors will move to countries with comparatively higher interest rate. This will raise the demand for foreign currency and foreign investors will convert their holdings of domestic currency into foreign currency. This will put pressure on the exchange rate depreciate, and since there is floating exchange rate regime so the Central Bank will not intervene.
Depreciation of the domestic currency will stimulate the exports and will reduce imports which will now become expensive. So, both the income and net exports will rise. So, the given statement is True.
Part 3) Change in the interest rate is reflected by movement along the IS curve. In other words, change in the interest rate does not shift the IS curve. So, the statement is False.
1.) The introduction of automatic teller machines, which reduces the demand for money, will,according to the...
1.) The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell–Fleming model with floating exchange rates, lead to a rise in both income and net exports. True False
The introduction of automatic teller machines, which reduces the demand for money, will,according to the Mundell–Fleming model with fixed exchange rates have no change in income or net exports. True False The IS curve shifts to the right when interest rates decreases thereby increasing GDP. True False
The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell–Fleming model with floating exchange rates, lead to a rise in both income and net exports. True False If the Fed announces that it will fix the exchange rate at 100 yen per dollar, but with the current money supply the equilibrium exchange rate is 150 yen per dollar, then the money supply must be increased to maintain the Fed's announcement. True False
1.) The introduction of automatic teller machines, which reduces the demand for money, will,according to the Mundell–Fleming model with fixed exchange rates have no change in income or net exports. True False
Money Demand According to Liquidity Preference Theery, why is the Money Demand curve downwaed sloping? a because interest rates rise as the Bank of Canada reduces the quantity of money demanded b. because interest rates fall as the Bank of Canada reduces the Money Supply c because people will want to hold less money as the cost of doing so fals d. because people will want to hold more money as the cost of doing so falls Money Demand and...
Exercise 3 (7 points): According to Mundell-Fleming (IS-LM-BP) model, which are the consequences (i.e the new equilibrium compared with the equilibrium position before the policy) of an increase in public expenditure if exchange rates are fixed and there is capital immobility? 1 Increase in net exports, same income 21 Increase in income, reduction in net exports Incrase of income, depreciation of the exchange [3] Increase in the interest rate, decrease of income. [1 same income, same interest rate; ® Increase...
When the money demand curve shifts right and the money supply is unchanged, the equilibrium price level decreases and the equilibrium value of money increases. true false The money supply in Grayfield is $8 billion. Nominal GDP is $32 billion and real GDP is $24 billion. The central bank of Grayfield has instituted a policy of zero inflation. Assuming that velocity is stable, if real GDP grows by 2.5 percent this year then the central bank of Grayfield will increase...
7. Those who advocate counter-cyclical fiscal policy would agree with all but one of the following statements. Which is the exception? A) Governments should be non-interventionist. B) Automatic stabilizers are not particularly effective. C) The economy is not capable of automatic self-adjustment in response the problems of unemployment and inflation. D) Counter cyclical fiscal policy is a powerful and effective tool. E) Government budget deficits are a less serious problem than income gaps. 8. Assume that the economy is in...
Please give a detailed solution, thank you! 5. Given C 5000.75 (Y T) I = 2,000 -50r G 1,000 T 1,000 - 10Y - 2000r Ms 50,000 P a. Derive the IS curve and the LM curve, and find the equilibrium interest rate and output b. Government spending increases by 500. If the central bank does not react at all to this change, what is the new equilibrium output and interest rate? If instead the central bank wants to keep...
According to the quantity equation, if velocity is stable, an increase in the money supply of three percent and an increase in real GDP of four percent causes the price level to rise by one percent. true false Money demand refers to how much wealth people want to hold in liquid form and money demand depends on both the price level and the interest rate true false Bertha gives her employees a $1 increase in their hourly wage. However, the...