In the monetary small open-economy model with a fixed exchange rate, an increase in the foreign price level

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In a small open economy with a fixed exchange rate, an increase in the foreign price level leads to an increase in the domestic price level as the country imports inflation. This process often involves an increase in the domestic money supply, as the central bank may buy foreign currency to maintain the fixed exchange rate, thereby injecting more domestic currency into the economy.

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