Question 1

Suppose the central bank increases the money supply in a closed economy. According to the IS-LM model, what is the most likely short-run effect on the interest rate and output?

Accepted Answer

The interest rate falls and output rises.

Question 2

In the open economy IS-LM-UIP model, if the domestic interest rate is below the foreign interest rate, what is expected to happen to the domestic currency according to the uncovered interest parity (UIP) condition?

Accepted Answer

The domestic currency is expected to depreciate.

Question 3

Which of the following equations correctly represents the IS curve in a closed economy?

Accepted Answer

$$Y = C(Y - T) + I(r) + G$$

Question 4

A negative supply shock (such as a sudden increase in oil prices) will shift which curve in the AS-AD model, and in which direction?

Accepted Answer

The AS curve to the left.

Question 5

If the government increases taxes, what is the immediate effect on the IS curve in the IS-LM model?

Accepted Answer

The IS curve shifts to the left.

Question 6

Given the money market equilibrium $$M/P = L(Y, r)$$, what happens to the equilibrium interest rate if real income $$Y$$ increases, holding $$M$$ and $$P$$ constant?

Accepted Answer

The equilibrium interest rate rises.

Question 7

Suppose the central bank in an open economy pegs the exchange rate below the market equilibrium. What is the likely consequence for the central bank's foreign reserves?

Accepted Answer

Foreign reserves will decrease.

Question 8

Which of the following best describes the medium-run adjustment in the AS-AD model after an expansionary fiscal policy?

Accepted Answer

Prices rise, and output returns to potential output.

Question 9

If the nominal exchange rate is fixed and the central bank increases the money supply, what is the likely short-run effect on output in the open economy IS-LM-UIP model?

Accepted Answer

There is no effect on output.

Question 10

Suppose the domestic interest rate is 3%, the foreign interest rate is 5%, and the expected depreciation of the domestic currency is 2%. According to the UIP condition, is there an arbitrage opportunity?

Accepted Answer

No, because $$i = i^* + E^e$$

Question 11

Which of the following is NOT a component of aggregate demand in the open economy?

Accepted Answer

Money supply ($$M)$$

Question 12

If the central bank wants to maintain a fixed exchange rate but faces persistent capital outflows, what policy action is it most likely to take?

Accepted Answer

Sell foreign reserves to buy domestic currency.

Question 13

In the IS-LM model, which of the following would cause the LM curve to shift to the right?

Accepted Answer

An increase in the money supply.

Question 14

Suppose the economy is initially at potential output. A positive demand shock shifts the AD curve to the right. In the medium run, what happens to the price level and output?

Accepted Answer

Price level rises, output returns to potential.

Question 15

Which of the following best describes the relationship given by the uncovered interest parity (UIP) condition?

Accepted Answer

$$i = i^* + \frac{E^e - E}{E}$$

Question 16

A country experiences a sudden increase in exports due to a global boom. In the open economy IS-LM-UIP model, what is the likely short-run effect on output and the exchange rate?

Accepted Answer

Output rises and the domestic currency appreciates.

Question 17

If the price level increases unexpectedly, what is the immediate effect on the real money supply ($$M/P) $$and the LM curve?

Accepted Answer

Real money supply falls, LM curve shifts left.

Question 18

Which of the following is a key assumption of the IS-LM-UIP model in an open economy?

Accepted Answer

Perfect capital mobility.

Question 19

Suppose the government increases spending and the central bank simultaneously increases the money supply. In the IS-LM model, what is the combined effect on output and interest rates?

Accepted Answer

Output rises, but the effect on interest rates is ambiguous.

Question 20

In the medium-run AS-AD model, what mechanism ensures that output returns to its natural level after a demand shock?

Accepted Answer

Wage and price adjustments.

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