In a Small Open Economy with a Fixed Exchange Rate

question 8

Multiple Choice

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

• A) the exchange rate rises but income does not rise.
• B) income rises but the exchange rate does not rise.
• C) both income and the exchange rate rise.
• D) neither income nor the exchange rate rises, as the money supply contracts.

---

Definitions:

Retail Method

An accounting method for inventory valuation in which ending inventory and cost of goods sold are determined by applying a constant gross margin percentage.

Inventory Cost

The total cost associated with acquiring, holding, and processing inventory, including purchase costs, storage fees, and handling charges.

Estimated Cost

The anticipated cost or price of an item, service, or project based on current information, forecasts, and analyses before actual costs are incurred.

Estimated Method

An approach that involves approximating financial figures or outcomes based on available data and educated assumptions.