In a small open economy with perfect capital mobility, if the exchange rate is flexible, which of the following would be the effect of an expansionary monetary policy?
A)It would cause the domestic interest rate to remain above the world interest rate.
B)It would cause the domestic interest rate to remain below the world interest rate.
C)It would leave the domestic interest rate equal to the world interest rate.
D)It would cause the domestic currency to appreciate.

Question

Quizplus · Accepted Answer

In a small open economy with perfect capital mobility and a flexible exchange rate, the domestic interest rate is determined by the world interest rate. Expansionary monetary policy would lead to a depreciation of the domestic currency, but the domestic interest rate would remain equal to the world interest rate due to capital mobility.

In a Small Open Economy with Perfect Capital Mobility, If