In a Small Open Economy with a Fixed Exchange Rate

question 113

Multiple Choice

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short-run equilibrium the money supply:

• A) increases to keep the exchange rate unchanged, thus augmenting the effect of government spending on income.
• B) decreases to keep the exchange rate unchanged, thus offsetting the effect of government spending on income.
• C) remains unchanged, and there is no effect of government spending on income.
• D) remains unchanged to keep the interest rate at the world interest rate, so that government spending reduces income.

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Definitions:

Scientific Management

A management theory that analyzes and synthesizes workflows, aiming to improve economic efficiency and labor productivity.

Sociologist

A social scientist who studies the development, structure, and functioning of human society and the social problems it faces.

Free Markets

Economic systems in which prices for goods and services are determined by the open market and consumers, in the absence of government intervention.

Regulated Markets

Markets that are subject to oversight and control by governmental or other authoritative entities to ensure fairness, competition, and compliance with laws.