In a Small Open Economy with a Floating Exchange Rate

question 94

Multiple Choice

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

• A) interest rate falls and the level of investment rises.
• B) exchange rate falls and net exports increase.
• C) interest rate falls but the level of investment does not rise.
• D) exchange rate falls but net exports do not increase.

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Definitions:

No-Trade Situation

A theoretical scenario where no trade occurs either because of complete self-sufficiency or prohibitive trade barriers.

International Trade

The exchange of goods and services between countries, allowing for increased efficiency, market expansion, and access to resources.

Multilateral Approach

A multilateral approach in diplomacy or trade involves the participation of more than two countries, organizations, or parties to work on a specific issue or within a treaty framework.

Unilateral Approach

An action or policy decision made and implemented by a single governing body, organization, or individual without cooperation or agreement from others.