What is an exchange rate?
A: The price of one currency in terms of another (e.g. 1 € = 1.10 $)
Q: What is currency appreciation?
A: When a currency becomes stronger – it buys more of another currency.
Q: What is currency depreciation?
A: When a currency becomes weaker – it buys less of another currency.
Q: What happens if the domestic interest rate falls (under flexible exchange rates)?
A: Capital flows out → currency depreciates → exports rise → output increases.
Q: What does the Mundell-Fleming model show?
A: How goods market (IS), money market (LM), and currency market interact in an open economy.
Q: When is monetary policy effective?
A: Under flexible exchange rates, not under fixed exchange rates.
Q: When is fiscal policy effective?
A: Under fixed exchange rates, not under flexible exchange rates.
Q: What does the DD curve represent?
A: Equilibrium in the goods market – higher E (weaker currency) → higher demand/output.
Q: What does the AA curve represent?
A: Equilibrium in money & currency markets – higher Y → stronger currency (lower E).
Q: What happens when monetary policy is used (e.g. interest rate ↓)?
A: AA shifts upward → E ↑ (depreciation), Y ↑
Q: What happens when fiscal policy is used (e.g. government spending ↑)?
A: DD shifts right → E ↓ (appreciation), Y ↑
Q: What happens in a negative confidence shock?
A: AA ↓ and DD ↓ → E ↓ and Y ↓
Last changed15 days ago