In a small open economy with a floating exchange rate, an effective policy to decrease equilibrium output is to:
A) decrease government spending.
B) decrease taxes.
C) increase the money supply.
D) decrease the money supply.

Question

Quizplus · Accepted Answer

Decreasing the money supply in a small open economy with a floating exchange rate will lead to higher interest rates, which can reduce investment and consumption, thus decreasing equilibrium output.

In a Small Open Economy with a Floating Exchange Rate