In the monetary small open-economy model with a fixed exchange rate,an increase in the world real interest rate
A) increases domestic output and has no effect on the domestic price level.
B) decreases domestic output and has no effect on the domestic price level.
C) increases the domestic price level and has no effect on domestic output.
D) decreases the domestic price level and has no effect on domestic output.

Question

Quizplus · Accepted Answer

An increase in the world real interest rate will make domestic assets less attractive, leading to a capital outflow and a decrease in the domestic money supply. This will decrease domestic output and has no effect on the domestic price level.

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