In a Small Open Economy with a Floating Exchange Rate

question 125

Multiple Choice

In a small open economy with a floating exchange rate, if the government decreases the money supply, then in the new short-run equilibrium:

• A) income falls and the exchange rate rises.
• B) the exchange rate falls and income rises.
• C) income remains unchanged but the exchange rate rises.
• D) the exchange rate remains unchanged but income falls.