Which answer from highligted is correct? Consider a small open economy which is

Question

Which answer from highligted is correct?

Consider a small open economy which is in a fixed exchange rate regime and foreign and domestic assets are considered perfect substitutes. If the central bank of this country buys domestic assets

the central bank's international reserves will decrease.

the monetary base will decrease.

the monetary base will increase.

the overall money supply will increase.

the central bank's international reserves will increase

1b

Consider a small open economy in which E is the price of foreign currency in terms of domestic currency, and Y is real output. Suppose this country is in a fixed exchange rate regime. If there is a decrease in this country's government spending, then in the short run

E and Y will not change.

Y will decrease but E will not change.

Y will increase but E will not change.

E will increase but Y will not change.

both E and Y will decrease

1c

If a country revalues its currency, then in a money market diagram with the amount of real money measured horizontally, the country's

real money supply curve will not shift and its real money demand curve will not shift.

real money supply curve will shift left and its real money demand curve will shift right.

real money supply curve will shift left and its real money demand curve will not shift.

real money supply curve will shift left and its real money demand curve will shift left.

real money supply curve will shift right and its real money demand curve will shift left.

Explanation / Answer

(1a) The monetary base would decrease. The correct answer is option (B).

(1b) The correct answer is option (E). Both E and Y would decrease as the country’s government spendings decreases.

(1c) The correct answer is option (A). If a country revalues its currency, then in a money market diagram with the amount of real money measured horizontally, the country’s real money supply curve will not shift and its real money demand curve will not shift.

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