QUESTIONS FOR REVIEW

Question 13.1

1. In the Mundell–Fleming model with floating exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when taxes are raised. What would happen if exchange rates were fixed rather than floating?

Question 13.2

2. In the Mundell–Fleming model with floating exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when the money supply is reduced. What would happen if exchange rates were fixed rather than floating?

Question 13.3

3. In the Mundell–Fleming model with floating exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when a quota on imported cars is removed. What would happen if exchange rates were fixed rather than floating?

Question 13.4

4. What are the advantages of floating exchange rates and fixed exchange rates?

Question 13.5

5. Describe the impossible trinity.

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