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

question 50

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.

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Definitions:

Debt Investments

Financial assets involving the loan of money from an investor to a borrower, often in the form of bonds or loans.

Available-For-Sale Securities

Financial assets that are not classified as held-to-maturity or trading securities, and can be sold in the market.

Stock Investments

Refers to the purchasing of shares in companies with the expectation of earning a return through dividends, share price appreciation, or both.

Loss on Sale

The financial loss incurred when the selling price of an asset is less than its carrying value on the balance sheet.