In the monetary small open-economy model with a fixed exchange rate, a temporary decrease in domestic total factor productivity in the absence of any other shocks

Question

Quizplus · Accepted Answer

A temporary decrease in domestic total factor productivity in the absence of any other shocks decreases output and the current account surplus. This is because a decrease in total factor productivity leads to a decrease in the production of goods and services, which in turn leads to a decrease in exports and an increase in imports. The resulting trade deficit leads to a decrease in the current account surplus.

In the Monetary Small Open-Economy Model with a Fixed Exchange