In the monetary small open-economy model with a fixed exchange rate,an increase in the foreign price level
A) increases the domestic money supply and increases the domestic price level.
B) increases the domestic money supply and decreases the domestic price level.
C) decreases the domestic money supply and increases the domestic price level.
D) decreases the domestic money supply and decreases the domestic price level.

Question

Quizplus · Accepted Answer

An increase in the foreign price level leads to an increase in the domestic money supply to maintain the fixed exchange rate, which in turn increases the domestic price level.

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