In a flexible exchange rate system with perfect capital mobility, if restrictive fiscal policy is implemented, we will see O a shift of the IS-curve to the left, followed by an appreciation of the domestic currency O a shift of the LM-curve to the left, followed by an appreciation of the domestic currency and a subsequent shift of the LM-curve back to its original position O a shift of the IS-curve to the left, followed by a depreciation of the domestic currency and a subsequent shift of the LM-curve to the left, leaving the domestic interest rate unchanged O a temporary decrease in the interest rate but a long-term decrease in the level of output O a shift of the IS-curve to the left, followed by a depreciation of the domestic currency and a subsequent shift of the IS-curve back to its original position

In a flexible exchange rate system with perfect capital mobility, if restrictive fiscal policy is implemented, we will see O a shift of the IS-curve to the left, followed by an appreciation of the domestic currency O a shift of the LM-curve to the left, followed by an appreciation of the domestic currency and a subsequent shift of the LM-curve back to its original position O a shift of the IS-curve to the left, followed by a depreciation of the domestic currency and a subsequent shift of the LM-curve to the left, leaving the domestic interest rate unchanged O a temporary decrease in the interest rate but a long-term decrease in the level of output O a shift of the IS-curve to the left, followed by a depreciation of the domestic currency and a subsequent shift of the IS-curve back to its original position

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter29: International Finance

Section: Chapter Questions

Problem 8P

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Based on the complete model of exchange rate determination, a permanent increase of 8% in the domestic money supply will cause O overshooting of the home exchange rate (i.e., home currency depreciates by more than 8%) both in the short run and in the long run. O the home currency to appreciate by more than 8% in the short run and then depreciate to its long-run level. the home currency in the short run to overshoot its long-run depreciation of 8% and then appreciate over time to its long-run level. the home currency to depreciate by 8% both in the short run and in the long run.
Assume a small open economy for which the uncovered interest rate parity condition consistently holds. Which of the following is true for domestic and foreign returns when seen from the perspective of the domestic economy? O The domestic return is equal to the domestic interest rate. The foreign return is equal to the foreign interest rate and the expected rate of depreciation. With a given, fixed expectation for the future exchange rate, the expected rate of depreciation will increase following a rise in domestic return. An expected x% depreciation of the domestic currency is equivalent to an x% return in foreign investments because income held in foreign currency will increase in value in domestic currency terms over the investment period.
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