Posted by Bo on .
I need help on some T/F questions.
1. A decrease in the foreign interest rate results in a shift to the left by the IS curve.
2. Home's trade balance surplus must increase as a result of a decrease in Home's interest rate.
3. Since investment I is a function of nominal interest rate i, investor cares only about the nominal
interest rate, not the real interest rate.
4. An increase in real money demand results in a shift to the right left by the LM curve.
5. It is impossible to have autonomous monetary policy and fixed EX regime simultaneously.
1) I think True. A decrease in foreign interest should cause US investors to invest internationally. (Assuming flexible exchange rates).
2) I think False, same reasoning as in #1
3) Hummmm, I initiall thought false; of course investors care about the real interest rates. However, the answer may be true by assumption. If I=f(r), where I is investment and r is nominal interest, then real interest is not in the equation (except perhaps as a determinant of r). Perhaps I am overanalyzing things.
5) I will go with false. While it may be very difficult, it may be possible in an extreme case. Consider a world with zero international trade. (e.g, Tahiti before europeans arrived) Then, Tahiti's monetary policy would be meaningles; as too would Tahiti's fixed EX regime policy.
For 2), if decrease in i, cause Exchange rate to depreciate in the foregin exchange market, which makes foreign goods more expensive, thus increaseing export, less import, Trade balance will increase, won't it?