In a Large Open Economy with a Floating Exchange Rate

question 13

Multiple Choice

In a large open economy with a floating exchange rate, such as in the United States, in the short run a monetary contraction:

• A) raises the interest rate, lowers investment and income, but does not affect the exchange rate.
• B) raises the exchange rate, lowers net exports and income, but does not affect the interest rate.
• C) initially raises the exchange rate, causing arbitrageurs to sell dollars and return the money supply to its initial level.
• D) raises the interest rate and lowers investment and income, but also raises the exchange rate and lowers net exports.

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Definitions:

Insight

A deep understanding of a person or situation, often resulting in a clear and sometimes sudden discernment of a solution to a problem.

Fixation

An obsessive focus or attachment to certain behaviors, people, or developmental stages, often hindering emotional development.

Mental Set

A cognitive tendency to approach situations in a fixed way based on previous experiences, potentially inhibiting problem-solving.

Confirmation Bias

The bias towards selecting, decoding, favoring, and reminiscing over data that corroborates one's prior beliefs or conjectures.