Provide a brief overview of the Mundel-Fleming macroeconomic model of an open economy.
What will be an ideal response?
POSSIBLE RESPONSE: The Mundel-Fleming macroeconomic model facilitates the analysis of the interrelationships of a large number of macroeconomic variables within the context of three broad markets. These three markets that help provide a picture of the country's economy are the goods and services market, the money market and the market for foreign exchange. The first two markets, the goods and services market and the money market, directly influence the country's real gross domestic product (GDP) and its interest rate (Y and i). Real GDP and interest rates, in turn, have an impact on the country's balance of payments and the market for foreign exchange. All three markets are affected by exogenous forces. These outside forces represent shocks or disturbances that create pressures for macroeconomic changes. Factors such as fiscal policy, business climate, consumer confidence, and foreign trade shifts impact the domestic goods and services market. Monetary policy and changes in the demand for money impact the money market. Factors such as international lending shifts, foreign trade shifts, and changes in international price competitiveness impact foreign exchange markets and the country's balance of payments.
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It can be shown using the IS-LM-FX model that a temporary expansion in the supply of money is effective in:
A) raising rates of interest. B) raising the rate of unemployment. C) combating temporary downturns in the economy. D) increasing consumer confidence.
Answer the following statements true (T) or false (F)
1. A parallel shift in a budget line is caused by changes in a consumer's level of satisfaction. 2. A change in the relative prices for two goods can be shown as a parallel shift in a consumer's budget line. 3. Indifference curves are convex to the origin due to diminishing marginal rates of substitution. 4. Indifference curves and budget lines can be used to derive an individual's demand curve for a product.
Insufficient capital formation can limit a poor nation's economic growth.
Answer the following statement true (T) or false (F)
From a firm's point of view, when the demand for a good has a price elasticity of 0.5, then, all things remaining the same, a(n):
A) increase in the price of the good will decrease the firm's revenue. B) increase in the price of the good will increase the firm's revenue. C) change in the price of the good will not affect the firm's revenue. D) change in the price of the good will not affect the quantity of the good demanded by consumers.