An Important Assumption in the Application of the Mundell- Fleming

question 21

Multiple Choice

An important assumption in the application of the Mundell- Fleming model of exchange rates is that:

• A) the balance of payments is in deficit.
• B) the exchange rate is fixed.
• C) a small open economy cannot influence overseas interest rates.
• D) prices of short- dated bonds are more sensitive to market yields than long- dated bonds.

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Definitions:

Average Fixed Cost

The fixed costs of production (costs that do not change with the level of output) divided by the quantity of output produced.

Variable Cost

Costs that change in proportion to the level of activity or volume of production in a business.

Total Cost

Total cost refers to the aggregate sum of all costs, both fixed and variable, incurred by a business in producing goods or services.

Fixed Cost

Fixed cost is an expense that does not change with the level of production or sales, such as salaries, rent, and insurance.