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

Question

Quizplus · Accepted Answer

A monetary injection by the Bank of Canada in a small open economy with a flexible exchange rate causes a shift of the aggregate-demand curve farther to the right than it would in a closed economy due to the additional decrease in demand for Canadian-produced goods and services that is not realized in a closed economy. This is because, with a flexible exchange rate, the injection leads to an appreciation of the currency, making Canadian goods and services relatively more expensive, reducing net exports and partially offsetting the effect of the monetary stimulus.

In a Small Open Economy with a Flexible Exchange Rate,what