1. (10 points) What do the terms internal and external balance mean in international finance?
2. (12 points) In the Mundell-Fleming model of the open-economy, what are the conditions for equilibrium in (a) the product market; (b) the money market; and (c) the foreign exchange market.
3. (6 points) What are two factors that will shift the IS curve to the right?
4. (6 points) What are two factors that will shift the LM curve to the left?
5. (6 points) What are two factors that will shift the FE curve to the right?
6. (15 points) A country has a fixed exchange rate and capital is very mobile. Because it is experiencing high unemployment, the central bank increases the money supply. Using symbols and words and diagrams, explain what will happen to (a) internal balance; (b) external balance; (c) the country’s exchange rate. How must the central bank respond if it wishes to maintain the fixed exchange rate?
7. (15 points) In the case above, the government tries to reduce unemployment by increasing government spending (expansionary fiscal policy). Explain, using symbols, words and diagrams, what will happen to internal and external balance. What will happen to the exchange rate?
8. (15 points) If, in the case above, capital is not very mobile, how will fiscal policy impact the economy? The exchange rate? Again, use symbols, words and diagrams.
9. (15 points) What is the J-curve effect in international finance? What are three possible causes of the J-curve effect?
