Suppose, in the Basic Mundell-Fleming Diagram That Plots the Internal

question 12

Multiple Choice

Suppose, in the basic Mundell-Fleming diagram that plots the internal balance (IB) and external balance (EB) schedules against the interest rate (i) and government spending minus taxes (G - T) , that the economy is located at a point that is above (or to the left) of the IB schedule and also above (or to the left) of the EB schedule. In this situation the economy is experiencing

• A) unacceptably high unemployment and a balance-of-payments deficit.
• B) unacceptably high unemployment and a balance-of-payments surplus.
• C) unacceptably rapid inflation and a balance-of-payments deficit.
• D) unacceptably rapid inflation and a balance-of-payments surplus.

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Definitions:

Money Supply

The complete accumulation of assets measured in money terms within an economy at any specified moment, including coins, cash, and the deposits across checking and savings accounts.

Interest Rate

The cost of borrowing money, expressed as a percentage of the total amount loaned, or the profit earned on savings and investments.

Money Market Equilibrium

The state where the supply of and the demand for money balances, resulting in economic stability at a given interest rate.

Interest Rate

The amount charged by lenders to borrowers for the use of assets, expressed as a percentage of the principal, or the amount earned by an investment.