QUESTIONS FOR REVIEW

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?

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?

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?

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

5. Describe the impossible trinity.