1.  Given the equilibrium of IS and LM​, an increase in the equilibrium interest rate would cause the equilibrium exchange rate to​ ________.     A. decrease if foreign interest rates were constant   B. increase if foreign interest rates were constant   C. decrease if foreign interest rates decreased   D. increase if foreign interest rates increased

Principles of Economics, 7th Edition (MindTap Course List)
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ISBN:9781285165875
Author:N. Gregory Mankiw
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Chapter32: A Macroeconomic Theory Of The Open Economy
Section: Chapter Questions
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1. 

Given the equilibrium of IS and
LM​,
an increase in the equilibrium interest rate would cause the equilibrium exchange rate to​ ________.
 
 
A.
decrease if foreign interest rates were constant
 
B.
increase if foreign interest rates were constant
 
C.
decrease if foreign interest rates decreased
 
D.
increase if foreign interest rates increased
2. Assuming an economy where the level of output
​(Y​)
is below​ potential, if an increase in government spending
​(G​)
shifts output towards​ potential, it is likely there will be
____
 
no change
a decrease
an increase
in the interest parity relation.
 
3. 
An expansionary fiscal policy has a greater effect on output in an economy with fixed exchange rates than in an economy with flexible exchange​ rates, because
 
 
A.
the LM curve shifts up under fixed exchange rates and hence the​ short-run equilibrium has an output greater than under the flexible exchange rates.  
 
B.
the money supply is not a policy tool of the central bank under fixed exchange rates and hence the LM curve shifts up to accommodate the increased demand for money casued by an upward pressure on the interest rate and an increase in demand for money caused by an increase in output.  
 
C.
the central bank must decrease the money supply in order to offset the decreased demand for money casued by an upward pressure on the interest rate.
 
D.
the central bank must increase the money supply in order to accommodate the increase in demand for money caused by an increase in output and prevent the currency from appreciating.  
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