Question 1

"Under flexible exchange rate system,fiscal policy is ineffective,but monetary policy is effective in changing domestic income."

Accepted Answer

A) True 
 B)False

Question 2

"The balance of payment equilibrium implies that current account equals to zero."

Accepted Answer

A) True 
 B)False

Question 3

Figure 13.2 
-Refer to Figure 13.2.In a flexible exchange rate regime,if an economy is experiencing external disequilibrium at point B,then the domestic currency will:

Accepted Answer

A)   depreciate, shifting the IS curve to the right.
B)   depreciate, shifting the IS curve to the left.
C)   appreciate, shifting the IS curve to the right.
D)   appreciate, shifting the LM curve to the left.

Question 4

Figure 13.1 
-Refer to Figure 13.1.In a fixed exchange rate regime,if an economy is experiencing external disequilibrium at point B,then to peg the exchange rate the central bank has to:

Accepted Answer

A)   buy domestic currency, sell foreign currency, and shift the LM to the right.
B)   buy foreign currency, sell domestic currency, and shift the LM to the right.
C)   buy domestic currency, sell foreign currency, and shift the IS to the left.
D)   buy foreign currency, sell domestic currency, and shift the IS to the right.

Question 5

The IS curve represents the __________,while the LM curve represents the _________.

Accepted Answer

A)   foreign exchange market; money market
B)   foreign exchange market; bond market
C)   goods and services market; foreign exchange market
D)   goods and services market; money market

Question 6

The internal and external equilibrium occurs when the IS curve crosses the LM curve above the BP curve.

Accepted Answer

A) True 
 B)False

Question 7

Figure 13.2 
-Refer to Figure 13.2.Starting from an equilibrium point A,which of the following factors would cause the IS curve to shift to the left.

Accepted Answer

A)   A tax cut
B)   A decrease in money supply
C)   An increase in money supply
D)   A decrease in government spending

Question 8

"An expansionary monetary policy shifts the LM curve to the right and causes the domestic interest rate to rise."

Accepted Answer

A) True 
 B)False

Question 9

If,other things being equal,a country with a flexible exchange rate decreases its money supply,this will lead to _____ in the value of the country's currency,which will tend to _____ national income.

Accepted Answer

A)   a depreciation; increase
B)   a depreciation; decrease
C)   an appreciation; increase
D)   an appreciation; decrease

Question 10

A change in fiscal policy shifts the:

Accepted Answer

A)   IS curve
B)   LM curve
C)   BP curve
D)   None of the above

Question 11

A change in the monetary policy shifts the:

Accepted Answer

A)   IS curve
B)   LM curve
C)   BP curve
D)   None of the above

Question 12

With perfect substitutability and perfect capital mobility,the domestic interest rate is equal to the foreign interest rate.

Accepted Answer

A) True 
 B)False

Question 13

The LM curve represents all the points where money supplied is equal to money demanded.

Accepted Answer

A) True 
 B)False

Question 14

If the capital is perfectly immobile due to restrictions,then the BP curve is:

Accepted Answer

A)   Horizontal
B)   Vertical
C)   Downward-sloping
D)   Upward-sloping

Question 15

An economy starts in an equilibrium condition in three markets under flexible exchange rate regime and perfect capital mobility.If the central bank in a foreign country increases its interest rate,what would happen in the domestic country?

Accepted Answer

A)   domestic currency depreciates and the IS curve shifts to the right.
B)   domestic currency appreciates and the IS curve shifts to the left.
C)   domestic currency depreciates and the LM curve shifts to the right.
D)   domestic currency appreciates and the LM curve shifts to the left.

Question 16

Assume perfect capital mobility and floating exchange rates.If the government runs a budget deficit,the domestic currency will _______ and cause the IS curve to ________.

Accepted Answer

A)   Appreciate, shift to the right
B)   Appreciate, shift to the left
C)   Depreciate, shift to the right
D)   Depreciate, shift to the left

Question 17

Assume perfect capital mobility and floating exchange rates.Then,if the central bank increases money supply,the domestic currency will _______ and cause the IS curve to ________.

Accepted Answer

A)   Appreciate, shift to the right
B)   Appreciate, shift to the left
C)   Depreciate, shift to the right
D)   Depreciate, shift to the left

Question 18

Use this graph to answer questions 21 and 22.
Figure 13.3: C horizontal curve? A)  It assumes perfect capital mobility. B)  It assumes perfect substitutability between domestic and foreign assets. C)  It represents equilibria in the balance of payment. D)  All of the above are correct." class="answers-bank-image d-inline" rel="preload" >
-Using Figure 13.3,which of the following is correct about the BPC horizontal curve?

Accepted Answer

A)   It assumes perfect capital mobility.
B)   It assumes perfect substitutability between domestic and foreign assets.
C)   It represents equilibria in the balance of payment.
D)   All of the above are correct.

Question 19

A change in the riskiness of country's assets shifts the:

Accepted Answer

A)   IS curve
B)   LM curve
C)   BP curve
D)   None of the above

Question 20

Use this graph to answer questions 21 and 22.
Figure 13.3: A B)  BPB C)  BPC D)  BPD" class="answers-bank-image d-inline" rel="preload" >
-Using Figure 13.3,if a country experiences less than perfect capital mobility,the BP curve has a shape like:

Accepted Answer

A)   BPA
B)   BPB
C)   BPC
D)   BPD

Exam 13: The Is-Lm-Bp Approach

"An expansionary monetary policy shifts the LM curve to the right and causes the domestic interest rate to rise."

Correct AnswerverifiedShow Answer

The IS curve represents the __________,while the LM curve represents the _________.

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Figure 13.2 -Refer to Figure 13.2.Starting from an equilibrium point A,which of the following factors would cause the IS curve to shift to the left.

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If the capital is perfectly immobile due to restrictions,then the BP curve is:

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"Under flexible exchange rate system,fiscal policy is ineffective,but monetary policy is effective in changing domestic income."

Correct AnswerverifiedShow Answer

Figure 13.1 -Refer to Figure 13.1.In a fixed exchange rate regime,if an economy is experiencing external disequilibrium at point B,then to peg the exchange rate the central bank has to:

Correct AnswerverifiedShow Answer

A change in the riskiness of country's assets shifts the:

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Use this graph to answer questions 21 and 22. Figure 13.3: -Using Figure 13.3,which of the following is correct about the BPC horizontal curve?

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Assume perfect capital mobility and floating exchange rates.Then,if the central bank increases money supply,the domestic currency will _______ and cause the IS curve to ________.

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The LM curve represents all the points where money supplied is equal to money demanded.

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A change in the monetary policy shifts the:

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With perfect substitutability and perfect capital mobility,the domestic interest rate is equal to the foreign interest rate.

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A change in fiscal policy shifts the:

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Figure 13.2 -Refer to Figure 13.2.In a flexible exchange rate regime,if an economy is experiencing external disequilibrium at point B,then the domestic currency will:

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An economy starts in an equilibrium condition in three markets under flexible exchange rate regime and perfect capital mobility.If the central bank in a foreign country increases its interest rate,what would happen in the domestic country?

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Use this graph to answer questions 21 and 22. Figure 13.3: -Using Figure 13.3,if a country experiences less than perfect capital mobility,the BP curve has a shape like:

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Assume perfect capital mobility and floating exchange rates.If the government runs a budget deficit,the domestic currency will _______ and cause the IS curve to ________.

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If,other things being equal,a country with a flexible exchange rate decreases its money supply,this will lead to _____ in the value of the country's currency,which will tend to _____ national income.

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The internal and external equilibrium occurs when the IS curve crosses the LM curve above the BP curve.

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"The balance of payment equilibrium implies that current account equals to zero."

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The IS curve represents the __,while the LM curve represents the _.

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Use this graph to answer questions 21 and 22. Figure 13.3: -Using Figure 13.3,which of the following is correct about the BP_C horizontal curve?

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Assume perfect capital mobility and floating exchange rates.Then,if the central bank increases money supply,the domestic currency will _ and cause the IS curve to __.

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Assume perfect capital mobility and floating exchange rates.If the government runs a budget deficit,the domestic currency will _ and cause the IS curve to __.

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If,other things being equal,a country with a flexible exchange rate decreases its money supply,this will lead to _ in the value of the country's currency,which will tend to _ national income.

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