Chapter 13

Question 1

Mundell-Fleming model

Answer 1

The IS-LM model for a small open economy.

Question 2

Floating exchange rates

Answer 2

An exchange rate that the central bank allows to change in response to changing economic conditions and economic policies.

Question 3

Fixed exchange rates

Answer 3

An exchange rate that is set by the central bank’s willingness to buy and sell the domestic currency for foreign currencies at a predetermined price.

Question 4

Devaluation

Answer 4

An action by the central bank to decrease the value of a currency under a system of fixed exchange rates.

Question 5

Revaluation

Answer 5

An action taken by the central bank to raise the the value of a currency under a system of fixed exchange rates.

Question 6

Impossible trinity

Answer 6

The fact that a nation cannot simultaneously have free capital flows, a fixed exchange rate, and independent monetary policy. Sometimes called the trilemma of international finance.