In a Small Open Economy with a Floating Exchange Rate

question 125

Multiple Choice

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

• A) income falls and the exchange rate rises.
• B) the exchange rate falls and income rises.
• C) income remains unchanged but the exchange rate rises.
• D) the exchange rate remains unchanged but income falls.

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Definitions:

Variable Cost

Costs that change in proportion to the level of output or activity in a business operation.

Total Variable Cost

The total of all costs that vary with changes in the production level or sales volume, such as raw materials, direct labor, and variable overhead.

Relevant Range

The range of activity or volume over which the assumed cost behavior is valid, within which fixed and variable costs do not change.

Incremental Manufacturing Cost

The additional cost incurred by producing one more unit of a product, often considered in decision-making and pricing.