In an Open Economy IS-LM Model with Flexible Exchange Rates

question 38

Multiple Choice

In an open economy IS-LM model with flexible exchange rates and perfect capital mobility, a decrease in the income tax rate will

• A)initially stimulate the economy but in the end not change the equilibrium level of output
• B)increase the domestic interest rate but only temporarily
• C)cause a change in the composition of output
• D)cause an inflow of funds that will lead to an appreciation of the domestic currency
• E)all of the above

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Definitions:

Capital Account Balance

A measure within a country's balance of payments that records all transactions involving the acquisition or disposal of capital assets, such as securities and real estate, between residents and nonresidents.

Legal Tender

Coins and paper money officially declared to be acceptable for the settlement of financial debts.

Car Importer

A company or individual that buys foreign cars and brings them into a country to sell.

Drug Trafficking

The illegal trade involving the cultivation, manufacture, distribution, and sale of substances which are subject to drug prohibition laws.