,1. Which of the following is a common effect of
expansionary fiscal policy in an open economy under a
flexible exchange rate regime?
A) Currency depreciation
B) Lower interest rates
C) Trade surplus
D) Currency appreciation
Answer: D) Currency appreciation
Rationale: Expansionary fiscal policy can lead to an
increase in interest rates, attracting foreign capital and
causing the domestic currency to appreciate.
2. The J-Curve effect in an open economy suggests that a
depreciation of the currency initially causes the trade
balance to:
A) Improve
B) Deteriorate
C) Remain unchanged
D) Adjust immediately
Answer: B) Deteriorate
Rationale: The J-Curve effect suggests that initially, a
currency depreciation worsens the trade balance before it
improves as quantities adjust.
, A) Have no effect on domestic output
B) Increase the real exchange rate
C) Cause the interest rate to fall
D) Have no effect on the interest rate under fixed
exchange rates
Answer: D) Have no effect on the interest rate under
fixed exchange rates
Rationale: With perfect capital mobility and fixed
exchange rates, monetary policy adjusts to keep the
interest rate constant.
4. A small open economy with a floating exchange rate
regime is likely to experience what effect of a monetary
expansion?
A) Decreased exports
B) Increased imports
C) Currency appreciation
D) Decreased domestic investment
Answer: B) Increased imports
Rationale: Monetary expansion depreciates the
currency, boosts output, and increases imports.
5. Which of the following factors does not affect the
exchange rate directly in the long run?
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