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:

Ambivalent Attachment

The attachment style for infants who are unwilling to explore an unfamiliar environment but seem to have mixed feelings about the caregiver—they cry when the caregiver leaves the room, but they cannot be consoled by the caregiver upon the caregiver’s return.

Secure

Feeling of being safe, stable, and free from fear or anxiety.

Anxious

Experiencing worry, unease, or nervousness, typically about an imminent event or something with an uncertain outcome.

Assimilation

The cognitive process of integrating new information into existing cognitive schemas, perceptions, and understanding.