In the monetary small open-economy model with a fixed 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 leads to a decrease in the real exchange rate, which increases the demand for domestic goods and services, leading to an increase in demand for money in the domestic economy.

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