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Students Zone - Revision Questions

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Chapter 4

Question 1

Using IS-LM-BP analysis compare and contrast the effectiveness of fiscal and monetary policies at influencing the level of real output in an open economy under floating exchange rates. Discuss the limitations of the IS-LM-BP framework.

Question 2

Using the IS/LM/BP model explain what is likely to happen following (i) a monetary contraction and (ii) a fiscal contraction under floating exchange rates. Discuss the main limitations of the IS/LM/BP model.

Question 3

"Although authorities can achieve both internal and external balance without resort to exchange rate adjustment, this does not mean that exchange rate changes are undesirable." Discuss.

Question 4

"Both monetary and fiscal policies must be actively used if an economy is to achieve both internal and external balance." Discuss.

Question 5

Explain with the aid of diagrams the difference between Tinbergen's instruments-targets rule and Mundell's principle of effective market classification.

Question 6

Discuss the importance of the degree of international capital mobility in determining the appropriate policy mix for the achievement of internal and external balance in an economy.

Question 7

"Tinbergen's instruments-targets rule and the IS-LM-BP model show us how we can theoretically achieve simultaneous internal and external balance. However, their practical application to the real world is limited." Discuss.

Question 8

"Not only do the authorities need to employ as many policy instruments as they have targets, they need to get the pairing of instruments to targets correct." Discuss this statement with regard to the formulation of economic policy in an open economy.