Name: _ Date: _1.Compared to a closed economy, an open economy is one that:A)allows the exchange rate to float.B)fixes the exchange rate.C)trades with other countries.D)does not trade with other countries.2.The MundellFleming model assumes that:A)prices are flexible, whereas the ISLM model assumes that prices are fixed.B)prices are fixed, whereas the ISLM model assumes that prices are flexible.C)as in the ISLM model, prices are fixed.D)as in the ISLM model, prices are flexible.3.The MundellFleming model is a _ model for a _ open economy.A)short-run; smallB)short-run; largeC)long-run; largeD)long-run; small4.In the MundellFleming model:A)the exchange rate system must have a floating exchange rate.B)the exchange rate system must have a fixed exchange rate.C)it makes no difference whether the exchange rate system has a floating or a fixed exchange rate.D)the behavior of the economy depends on whether the exchange rate system has a floating or fixed exchange rate.5.In the MundellFleming model, the domestic interest rate is determined by the:A)intersection of the LM and IS curves.B)domestic rate of inflation.C)world rate of inflation.D)world interest rate.6.In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then _ would drive the domestic interest rate back to the level of the world interest rate.A)capital inflowB)capital outflowC)the central bankD)a decline in domestic saving7.Assuming there is perfect capital mobility, compared to a large open economy, a small open economy is one in which the:A)exchange rate is fixed.B)exchange rate is floating.C)domestic interest rate equals the world interest rate.D)domestic interest rate is not equal to the world interest rate.8.In a small open economy a decrease in the exchange rate will _ net exports and shift the _ curve.A)increase; ISB)decrease; ISC)increase; LMD)decrease; LM9.If short-run equilibrium in the MundellFleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the IS* curve:A)slopes downward and to the right because the higher the exchange rate, the lower the level of net exports and, therefore, of short-run equilibrium income in the goods market.B)is vertical because there is only one investment level that is consistent with the world interest rate.C)is vertical because the exchange rate does not enter into the IS* equation.D)slopes downward and to the right because the higher the exchange rate, the higher the level of net exports and, therefore, of short-run equilibrium income in the goods market.10.In the MundellFleming model on a Y e graph, the curves labeled IS* and LM* are labeled that way as a reminder that:A)the price level is held constant at the world price level p*.B)the interest rate is held constant at the world interest rate r*.C)the exchange rate is held constant at the world exchange rate e*.D)output is held constant at the full employment level.11.If short-run equilibrium in the MundellFleming 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.12.In the MundellFleming 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.13.The intersection of the IS* and LM* curves shows the _ and the _ at which both the goods market and the money market are in equilibrium.A)interest rate; price levelB)price level; exchange rateC)level of output; exchange rateD)level of output; price level14.Under a floating system, the exchange rate:A)fluctuates in response to changing economic conditions.B)is maintained at a predetermined level by the central bank.C)is changed at regular intervals by the central bank.D)fluctuates in response to changes in the price of gold.15.In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to:A)increase government spending.B)increase taxes.C)increase the money supply.D)