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Econ 100b

Created 4/30/1996
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International Economics

Problem Set #6

Economics 100b; Spring 1996; Brad DeLong


1. Why, in the Mundell-Fleming model, is the LM* curve a vertical line?

2. Suppose that, in the Mundell-Fleming model, the equilibrium exchange rate is above the level e' at which the central bank wishes to keep the currency. Suppose that the central bank takes steps to peg the exchange rate to e'. Which curves shift--the IS*, the LM*, or both--and why?

3. What must be true about elasticity of demand for imports and exports, if net exports are to be a decreasing function of the real exchange rate?

4. Suppose exchange rates are fixed: is the imposition of a tariff expansionary or contractionary? Suppose exchange rates are flexible. Is the answer the same? Why or why not?

5. In the Mundell-Fleming model under flexible exchange rates, what happens to production, the exchange rate, and the trade balance if the world interest rate r* suddenly rises?

6. In the Mundell-Fleming model under fixed exchange rates, what happens to production, the exchange rate, and the trade balance if the world interest rate r* suddenly falls?

The Mundell-Fleming model can be used to analyze California's relationship with the rest of the country--if we consider California to be a "small open economy" with a fixed exchange rate to the rest of the U.S.:

7. Suppose that the state government had used "fiscal policy" to try to alleviate the depression of 1991-1993 in California by cutting state taxes and expanding spending. Does the Mundell-Fleming model predict that such a policy would have been a successful anti-California depression policy? Why or why not?

8. Suppose that the state government has used "monetary policy" to try to alleviate the depression of 1991-1993 in California by reducing reserve requirements of state-chartered banks--so that such banks would be able to support a larger supply of deposits and loans. Does the Mundell-Fleming model predict that such a policy would have been a successful anti-California depression policy? Why or why not?


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Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/