In the monetary small open-economy model with a flexible exchange rate,an increase in the foreign price level has which impact on domestic money demand?
A) It increases it.
B) It decreases it.
C) It has no impact.
D) It depends.

Question

Quizplus · Accepted Answer

An increase in the foreign price level will decrease the purchasing power of domestic currency, leading to an increase in the demand for domestic money to maintain the same level of transactions.

In the Monetary Small Open-Economy Model with a Flexible Exchange