Q1: According to the Mundell-Fleming model, what happens when interest rates rise in a small open economy compared to those in other countries?

The economy experiences a decrease in capital inflows.

The economy witnesses an increase in capital outflows.

The economy achieves a balance of payments surplus.

The exchange rate becomes fixed.

Q2: In the Mundell-Fleming model, which assumption is necessary for the equalization of returns on capital in financial markets of different countries?

Different tax rates among countries.

Q3: According to the Mundell-Fleming model, under what conditions is the domestic interest rate in a small open economy equal to the world interest rate?

When fiscal policy is expansionary.

When the exchange rate is fixed.

When capital mobility is restricted.

When capital is perfectly mobile and the exchange rate is flexible.

Q4: How does an expansionary fiscal policy affect a small open economy under a fixed exchange rate system with perfect capital mobility?

It leads to a depreciation of the domestic currency.

It causes an increase in domestic interest rates.

It results in capital outflows and a balance of payments surplus.

It triggers capital inflows and an appreciation of the domestic currency.

Q6: How does the Mundell-Fleming model suggest a small open economy under a flexible exchange rate system responds to an expansionary fiscal policy?

The economy experiences capital outflows and depreciation of the domestic currency.

The domestic interest rate rises and capital flows lead to an appreciation of the domestic currency.

Capital inflows lead to a balance of payments surplus.

The domestic interest rate falls and the domestic currency appreciates due to capital inflows.

Q7: In the Mundell-Fleming model, why is an independent monetary policy ineffective under a fixed exchange rate regime?

Capital inflows lead to higher domestic interest rates.

Capital outflows lead to currency depreciation.

Capital mobility is restricted.

Capital flows and exchange rate adjustments counteract the impact.

Q5: In the Mundell-Fleming model, what is the impact of an independent monetary policy under a fixed exchange rate regime?

It leads to changes in the balance of payments.

It causes shifts in the IS curve.

It results in changes in fiscal policy.

It is ineffective due to capital flows and exchange rate adjustments.

Q9: In the Mundell-Fleming model, what is the relationship between fiscal policy and the domestic interest rate under a fixed exchange rate regime with perfect capital mobility?

Fiscal policy has no impact on the domestic interest rate.

Fiscal expansion leads to lower domestic interest rates.

Fiscal contraction leads to higher domestic interest rates.

Fiscal policy is effective only in increasing capital outflows.

Q8: How does the Mundell-Fleming model describe the response of a small open economy with perfect capital mobility to changes in fiscal policy under a flexible exchange rate system?

Capital outflows lead to a depreciation of the domestic currency.

The domestic interest rate rises and capital inflows lead to currency appreciation.

Capital inflows lead to a balance of payments surplus.

The domestic interest rate falls and the domestic currency depreciates due to capital inflows.

Q10: How does the Mundell-Fleming model explain the effectiveness of fiscal policy under a fixed exchange rate regime with perfect capital mobility?

Fiscal policy has no impact under fixed exchange rates.

Fiscal policy influences exchange rates but not interest rates.

Fiscal policy affects interest rates but not exchange rates.

Fiscal policy can impact both interest rates and exchange rates.

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