Question from Past Macroeconomics Qualifying Exam (Fall, 2005 - Question two) at George Mason UniversityEdit

It is frequently suggested that, in the current environment of flexible exchange rates, when the US is in recession, US economic performance would improve if Japan and/or Euro-land stimulated their economies.

  • (a). Using the standard Mundell-Flemming model, contrast the effects of foreign fiscal and monetary expansion on
    • (i) US output;
    • (ii) world interest rates,
    • (iii) exchange rates,
    • (iv) the US trade balance.
  • (b). Suppose that the Federal Reserve were committed to using monetary policy to prevent the exchange value of the dollar from falling. How would this modify your answer to (a)?


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