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:

Divided Government

A situation in which the presidency is controlled by one political party while the opposite party controls one or both houses of Congress, leading to potential policy-making gridlock.

Presidency

The office and function of the President, which is the head of state and government in a republic, particularly in the United States.

Congress

The national legislative body of the United States, consisting of the Senate and the House of Representatives.

Electoral Realignment

A significant change in the political system of a country, often characterized by a shift in the popular support of political parties and reconfiguration of coalitions.