In an IS-LM Model with Flexible Exchange Rates and Perfect

question 41

Multiple Choice

In an IS-LM model with flexible exchange rates and perfect capital mobility, restrictive fiscal policy will

• A)cause an appreciation of the domestic currency
• B)shift first the LM-curve and then the IS-curve to the left
• C)not change the overall level of output, but will change its composition
• D)cause a decrease in net exports
• E)lower the level of output but leave the interest rate unchanged

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Definitions:

Luxury

High-quality goods or services that are not essential but are highly desired and associated with wealth or indulgence.

Substitutes

Goods or services that can be used in place of each other to satisfy consumer needs or desires.

Supply Curve

A graph showing the relationship between the price of a good and the amount of it that producers are willing to sell at each price level.

Market Period

A short duration in which the quantity of goods supplied to the market cannot be changed.