The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy is at Point A, a triple intersection. Here, the FE curve is steeper than the LM curve.
To maintain the fixed exchange rate and keep the economy at Point B, the monetary authority must
A. sell foreign currency and sell domestic government bonds.
B. buy foreign currency and sell domestic government bonds.
C. buy foreign currency and buy domestic government bonds.
D. sell foreign currency and buy domestic government bonds.
Answer: D
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Two nations have the following production capacity given their endowment of resources. Country A can produce 50 units of beer or 80 units of pizzas. Country B can produce 100 units of beer or 90 units of pizzas. Which of the following statements is most appropriate?
A. Country A has a comparative advantage in beer and Country B has an absolute advantage in pizzas. B. Country A has a comparative advantage in pizza and Country B has a comparative advantage in beer. C. Country A should specialize in pizza and Country B in beer making. D. Both answers b and c are correct.
A fixed exchange rate can be maintained by a government as long as it has sufficient
a. supplies of its own currency. b. foreign reserves. c. gold and other precious metals. d. tax revenues.