Question

1. In a fixed exchange rate regime how might an increase in the money supply effect the economy?

		expansionary monetary policy has no effect on the economy other than depleting reserves
		the LM curve would shift right permanently decreasing interest rates and stimulating higher economic activity
		the IS curve shifts right creating jobs and economic growth
		the BP curve shifts up causing crisis in financial markets

2. Which of the following policy combinations represents countries in the European Union?

		little inequality, stable exchange rate and autonomous monetary policy
		a common currency (dolarization), open capital markets and no autonomous monetary policy
		floating interest rates, open capital markets and autonomous monetary policy
		a strong EEuropean bond backed by all participant nations

3. The BP curve shows all of the combinations of the rate of interest and the level of income such that

		curent account+financial account+capital account = 0
		the money market is in equilibrium
		the labor market is in equilibrium
		trade is balanced

Answer 1

1.In a fixed exchange rate system an increase in the money supply has no effect on the economy other than depleting the reserves. Because an expansionary monetary policy lead to fall in the interest rate resulting in capital outflow. Thus demand for dollars increases resulting in depreciation of rupees. Central bank intervenes to keep exchange rate fixed by selling dollars for the rupees. As a result money supply decline and equilibrium is restored.

2.Among the given options, the most suitable policy combinations for European Union are floating exchange rate, open capital market and autonomous monetary policy.

3.The BP curve shows all combinations of interest rate and the level of income such that current account+ capital account+Financial account=0.