Question

40. Under perfect capital mobility and fixed exchange rates, expansionary _____ is a futile attempt because the _____.

a. fiscal policy; LM curve effectively is vertical.

b. monetary policy; LM curve effectively is the same as the FE curve.

c. fiscal policy; interest rate does not change.

d. monetary policy; IS curve will shift to the left.

41. The J curve shows that:

a. devaluation is more likely to improve the trade balance in the short-run than in the long-run.

b. devaluation is more likely to improve the trade balance after a longer span of time has elapsed.

c. devaluation is likely to be unstable.

d. devaluation is unlikely to improve the trade balance in either the short-run or the long-run.

42. Other fundamental things equal, a decrease in the exchange rate value of the domestic currency will make domestic goods:

a. to be demanded more internationally.

b. less competitive in the international markets.

c. less expensive in the domestic market.

d. less expensive to produce.

Answer 1

a) "B"

An expansionary monetary policy is futile because it will decrease the interest rate and cause the funds to flow out. It will continue to the point where the interest rate rise back and increased money supply is out of the country. The FE and LM curve is the same.  

b) "B"

J curve proves that in the short run the devaluation of the currency will not benefit but in the long run, the devaluation will be beneficial.

c) "A"

A devaluation of the local currency will make the local goods more competitive and increase the exports.