In the Monetary Small Open-Economy Model with a Flexible Exchange

question 22

Multiple Choice

In the monetary small open-economy model with a flexible exchange rate,an increase in the world real interest rate

• A) increases domestic output and increases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
• B) increases domestic output and decreases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
• C) decreases domestic output and increases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
• D) decreases domestic output and decreases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.
• E) increases domestic output and the nominal exchange rate as long as real money demand is much less responsive to real income than the real interest rate.

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