Question

1. The introduction of automatic teller machines, which reduces the demand for money, will,according to the Mundell–Fleming model with fixed exchange rates have no change in income or net exports.

   True

   False

2. The IS curve shifts to the right when interest rates decreases thereby increasing GDP.

   True

   False

Answer 1

1) TRUE. The introduction of automatic teller machines reduces the demand for money. Decrease in the demand for money leads to a rightward shift in the LM curve. This leads to a decrease in the interest rate. As a result of a decrease in the interest rate there is an increase in net capital outflow. Increase in the net capital outflow puts the depreciative pressure on the domestic currency. In order to maintain the fixed exchange rate, the central bank has to buy back the domestic currency and sell more of the foreign currency. This leads to a decrease in money supply in the domestic Economy. Decrease in the money supply leads to a leftward shift in the LM curve and the LM curve comes back to its original position. So, there is no change in income and net Exports. So, the introduction of automatic teller machines which reduces the demand for money, according to the Mundell-Fleming model with fixed exchange rates have no change in income or net Exports.

2) FALSE. When the interest rate decreases, there is a downward movement along the IS Curve increasing the GDP. There is not any shift in the IS curve. Hence, the given statement is False.