In a Short-Run Model of a Large Open Economy with a Floating

question 16

Multiple Choice

In a short-run model of a large open economy with a floating exchange rate:

• A) net exports determine the exchange rate, which in turn determines net capital outflow.
• B) net exports determine net capital outflow, which determines the interest rate.
• C) the interest rate is determined in the IS-LM framework, and this value determines net capital outflow; then the exchange rate adjusts to make net exports equal net capital outflow.
• D) the interest rate determines investment and net capital outflow, which are equal within the IS-LM framework; the exchange rate then determines net exports.

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Definitions:

Yield To Maturity

The total return anticipated on a bond if the bond is held until it matures.

Semi-Annually

Occurring twice a year, typically used in finance to describe payment intervals or adjustments.

Face Value

The nominal or dollar value printed on a bond, note, or other financial instrument, indicating its worth at maturity.

Treasury Bond

A long-term government bond issued by the U.S. Treasury with a maturity period typically ranging from 20 to 30 years.