In a Small Open Economy with a Floating Exchange Rate

question 80

Multiple Choice

In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium:

• A) income and the exchange rate will both rise.
• B) the exchange rate will rise, but income will remain unchanged.
• C) income will rise, but the exchange rate will remain unchanged.
• D) both income and the interest rate will rise.

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