In the New Keynesian open economy model
A) the nominal exchange rate is always fixed.
B) prices are flexible.
C) net exports depends on the relative price of foreign goods to domestic goods.
D) the nominal exchange rate is always flexible.

Question

Quizplus · Accepted Answer

In the New Keynesian open economy model, net exports depend on the relative price of foreign goods to domestic goods. This implies that the exchange rate must be flexible in order for the real exchange rate to adjust and maintain external balance. Prices are typically specified as being sticky in this model.

In the New Keynesian Open Economy Model