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Intermediate Macroeconomics, Class No.2 Fall 2009 Homework 5 Due 12/13/2009 Multiple choice questions 1. If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then * the LM curve: A) slopes upward and to the right because at a higher income a higher interest rate is needed to increase velocity. B) is vertical because monetary velocity is independent of the interest rate. * C) is vertical because the exchange rate does not enter into the LM equation. D) slopes upward and to the right because a higher exchange rate leads to a higher income. 2. In the Mundell-Fleming model, the exogenous variables are the: A) world interest rate, the price level, and the exchange rate. B) level of government spending, taxes, and income. C) exchange rate and level of income. D) price level, world interest rate, monetary policy, and fiscal policy. 3. In a small open economy with a floating exchange rate, a rise in government spending in the new short-run equilibrium: A) chokes off investment, but not by as much as the new government spending. B) chokes off an amount of investment just equal to the new government spending. C) attracts foreign capital, thus raising the exchange rate and reducing net exports, but not by as much as the new government spending. D) attracts foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to the new government spending. 4. Under a fixed-exchange-rate system, the central bank of a small open economy m