Small open economies tend to have
A) domestic price levels highly responsive to exchange rate movements.
B) domestic price levels that respond to exchange rate movements only when their central bank fails to intervene.
C) little competition from imports for those goods produced domestically.
D) domestic price levels that respond very little to exchange rate movements.
E) large price differences between the domestic and foreign prices of the good they export.

Question

Quizplus · Accepted Answer

Small open economies are highly integrated into the global market, making their domestic price levels very responsive to exchange rate movements. This is because changes in the exchange rate directly affect the cost of imports and the competitiveness of exports, which in turn influences domestic prices.

Small Open Economies Tend to Have