In a small open economy with flexible exchange rates,a contractionary monetary policy would
A)cause an exchange rate depreciation in the short run.
B)increase domestic output in the short run.
C)decrease domestic output in the short run.
D)decrease domestic output in the long run.

Question

Quizplus · Accepted Answer

A contractionary monetary policy involves decreasing the money supply, which leads to higher interest rates and a decrease in aggregate demand. In a small open economy with flexible exchange rates, this would cause a decrease in domestic output in the short run, as firms and households would reduce their spending. It would not necessarily cause an exchange rate depreciation or increase domestic output in the short run. In the long run, there could be adjustments and potential benefits from the contractionary policy, but the question specifically asks about the short run.

In a Small Open Economy with Flexible Exchange Rates,a Contractionary