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

question 124

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 LM^* curve:

• A) slopes upward and to the right because at a higher income a higher interest rate is needed to increase velocity.
• B) is vertical because monetary velocity is independent of the interest rate.
• C) is vertical because the exchange rate does not enter into the LM^* equation.
• D) slopes upward and to the right because a higher exchange rate leads to a higher income.

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