In a Small Open Economy with a Fixed Exchange Rate

question 8

Multiple Choice

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

• A) the exchange rate rises but income does not rise.
• B) income rises but the exchange rate does not rise.
• C) both income and the exchange rate rise.
• D) neither income nor the exchange rate rises, as the money supply contracts.

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Definitions:

Variable Expenses

Variable expenses are costs that vary directly with changes in production levels or business activity, such as materials and labor.

Contribution Margin

The amount remaining from sales revenue after all variable expenses have been deducted.

Traceable Fixed Expenses

Fixed costs that can be directly associated with a specific business segment or product, aiding in accurate financial analysis and decision-making.

Common Fixed Expenses

Costs that do not vary with the level of production or sales and are shared among different segments or products of a company.