48 For this question assume that the economy is operating in

48. For this question, assume that the economy is operating in a fixed exchange rate regime and that perfect capital mobility exists. Given this information, which of the following will occur? A) The domestic and foreign interest rates must be equal B) The central bank cannot use monetary policy to affect domestic output. C) An expansionary fiscal policy will require that the central bank increase the money supply D) all of the above E) none of the above 49. Suppose policy makers are pursuing a policy to fix the exchange rate. In such a system with perfect capital mobility, an open market purchase of domestic bonds by the domestic central bank will eventually result in A) a permanent increase in the monetary base B) a permanent reduction in the monetary base. C) a change in the composition of the monetary base D) a gradual reduction in the domestic interest rate 50. Under a fixed exchange rate regime, contractionary fiscal policy will tend to cause which of the following? A) a reduction in imports B) a reduction in net exports C) an increase in investment D) all of the above

Solution

47) Solution: all of the above

Explanation: When economy is operating in an fixed exchange rate regime and capital mobility exists the central bank needs to raise the money supply; and domestic as well as foreign interest rates need to be equal

49) Solution: a change in the composition of the monetary base

Explanation: system with perfect capital mobility to fix the exchange rate an open market purchase will lead to composition change of the monetary base

50) Solution: reduction in imports

Explanation: The contractionary fiscal policy under a fixed exchange rate regime will result in a fall of imports