In a Small Open Economy with a Floating Exchange Rate

question 76

Multiple Choice

In a small open economy with a floating exchange rate, the supply of real money balances is fixed and a rise in government spending:

• A) raises the interest rate, so that income must rise to maintain equilibrium in the money market.
• B) raises the interest rate so that net exports must fall to maintain equilibrium in the goods market.
• C) cannot change the interest rate so that net exports must fall to maintain equilibrium in the goods market.
• D) cannot change the interest rate so income must rise to maintain equilibrium in the money market.

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Definitions:

Demand

Demand in economics is defined as consumers' willingness and ability to purchase goods or services at a given price over a specific period of time.

Normal Goods

Goods for which demand increases as consumer income rises, and decreases when consumer income falls.

Inferior Goods

Goods for which demand decreases as the income of consumers increases, opposite to normal goods.

Quantity Demanded

Refers to the total amount of a good or service that consumers are willing and able to purchase at a given price level in a given period.