In the monetary small open-economy model with a fixed exchange rate,a temporary decrease in domestic total factor productivity in the absence of any other shocks
A) increases the current account surplus and increases the domestic money supply.
B) increases the current account surplus and decreases the domestic money supply.
C) increases the domestic money supply and decreases the current account surplus.
D) decreases the domestic money supply and decreases the current account surplus.

Question

Quizplus · Accepted Answer

A temporary decrease in domestic total factor productivity reduces output, leading to a decrease in exports and thus a decrease in the current account surplus. To maintain the fixed exchange rate, the central bank may need to sell foreign reserves, which decreases the domestic money supply.

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