In a small open economy, if the government adopts a policy that lowers imports, then the quantity of exports:
A) remains unchanged.
B) decreases but not as much as the quantity of imports decreases.
C) decreases by exactly the same amount as the quantity of imports decreases.
D) decreases by more than the quantity of imports decreases.

Question

Quizplus · Accepted Answer

In a small open economy, if imports decrease, it typically leads to an appreciation of the domestic currency due to a reduced supply of the domestic currency in the foreign exchange market. This appreciation makes exports more expensive for foreign buyers, reducing the quantity of exports. According to the balance of payments theory, under a floating exchange rate system, the decrease in imports will be matched by an equal decrease in exports to keep the balance of payments balanced.

In a Small Open Economy, If the Government Adopts a Policy