In the New Keynesian open economy model with a flexible exchange rate, suppose there is an increase in money demand. Which of the following happens?

Question

Quizplus · Accepted Answer

An increase in money demand in the New Keynesian open economy model with a flexible exchange rate leads to a decrease in the exchange rate because people need to exchange more of their own currency in order to obtain the foreign currency needed to buy goods and services from other countries, causing their own currency to depreciate. This depreciation makes imports more expensive and exports cheaper, which will ultimately benefit the economy.

In the New Keynesian Open Economy Model with a Flexible