In the monetary small open-economy model with a flexible exchange rate,an increase in the foreign price level decreases
A) domestic output, but has no effect on the domestic price level or the nominal exchange rate.
B) the domestic price level, but has no effect on domestic output or the nominal exchange rate.
C) the nominal exchange rate, but has no effect on domestic output or the domestic price level.
D) the domestic price level and the nominal exchange rate, but has no effect on domestic output.

Question

Quizplus · Accepted Answer

An increase in the foreign price level makes foreign goods more expensive, leading to an appreciation of the domestic currency, which decreases the nominal exchange rate.

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