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

question 10

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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Definitions:

Continental Collision

A tectonic process where two continental plates collide, leading to the formation of mountains and other geological features.

Foreland Basin

A structural basin located adjacent to mountain ranges, formed by the flexing of the earth's crust due to the weight of the mountain range.

Ocean-Continent Convergent Margin

A boundary between tectonic plates where an oceanic plate is subducting beneath a continental plate, leading to volcanic and seismic activity.

Fold and Thrust Belt

A series of mountainous folds and fault-driven compressions in the Earth's crust, typically found at convergent tectonic plate boundaries.