If Short-Run Equilibrium in the Mundell-Fleming Model Is Represented by a Graph

question 135

Multiple Choice

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the IS^* curve:

• A) slopes downward and to the right because the higher the exchange rate, the lower the level of net exports and, therefore, of short-run equilibrium income in the goods market.
• B) is vertical because there is only one investment level that is consistent with the world interest rate.
• C) is vertical because the exchange rate does not enter into the IS^* equation.
• D) slopes downward and to the right because the higher the exchange rate, the higher the level of net exports and, therefore, of short-run equilibrium income in the goods market.

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