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

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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