Tutorial 8
Chapter 10: Macroeconomic equilibrium in the short run
Open questions: Exercises 2, 4, 5 and 6 from the book.
Extra question: Exercise 11from the book(parts (i) and (ii) only).
Chapter 11: International capital flows and macroeconomic equilibrium
Multiple choice questions
Question 1
Assume a small, open home country under a flexible exchange rate regime with full capital mobility. The economy is initially in a general equilibrium at point A. If the central bank pursues an expansionary monetary policy which shifts the TR curve to TR’, a new equilibrium is reached at which ONE of the following?
a. At point C, since the expansionary monetary policy lowers the domestic interest rate below the level of the international rate of return.
b. At point A, because due to the interest rate parity condition, the TR’ curve must shift back to TR.
c. At point D, because the expansionary monetary policy induces an exchange rate depreciation which shifts the IS curve to IS’, but due to the interest rate parity condition, the TR’ curve must shift back to TR.
d. At point B, because the expansionary monetary policy induces an exchange rate depreciation which shifts the IS curve to IS’.
Question 2
Under a flexible exchange rate system, a [(A)______] policy expansion would lead to [(B) ______].
a. (A) fiscal; (B) an increase in real GDP
b. (A) fiscal; (B) an increase in the interest rate
c. (A) monetary; (B) an increase in real GDP
d. (A) monetary; (B) decrease in the interest rate
Question 3
Assume a small open economy with a flexible exchange rate system. An increase in the foreign interest rate will lead to
a. A rise in the domestic interest rate and a rise in domestic GDP
b. A fall in the domestic interest rate and a fall in domestic GDP
c. A rise in the domestic interest rate and a fall in domestic GDP
d. A fall in the domestic interest rate and a rise in domestic GDP
Open question: Exercises 1, 9 (floating exchange rate only) and 10 (floating exchange rate only) from the book.
Extra question: Exercise 7 from the book.