In a Small Open Economy with a Fixed Exchange Rate

question 35

Multiple Choice

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run equilibrium the exchange rate ______, and the LM* curve shifts to the ______.

• A) decreases; left
• B) increases; left
• C) decreases; right
• D) increases; right

---

Definitions:

Centralization

The concentration of decision-making authority at upper levels of an organizational hierarchy.

Demand Instrument

A financial document or security that requires payment of the specified amount on demand by the holder, without specifying a particular time for repayment.

Bearer Instrument

A negotiable financial instrument that is not registered in anyone's name and can be transferred from one person to another by possession.

Two-party Instrument

A financial document or contract that involves two parties directly, typically involving a payer and a payee.