In a small open economy with a flexible exchange rate, what does a monetary injection cause?
A) It causes the dollar to appreciate.
B) It causes net exports to decline.
C) It causes an additional decrease in demand for Canadian-produced goods that is not realized in a closed economy.
D) It causes a shift of the aggregate demand curve farther to the right than in a closed economy.

Question

Quizplus · Accepted Answer

In a small open economy with a flexible exchange rate, a monetary injection would cause a shift of the aggregate demand curve farther to the right than in a closed economy. This is because the increase in the money supply would lead to lower interest rates, which in turn, would lead to an increase in consumption and investment spending. In a small open economy, the flexible exchange rate would cause the currency to depreciate, which would also increase the demand for exports and further shift the aggregate demand curve to the right.

In a Small Open Economy with a Flexible Exchange Rate