In the basic model of a small open economy,if the government adopts a policy that lowers imports,then that policy:
A) raises the real exchange rate and increases net exports.
B) raises the real exchange rate and does not change net exports.
C) raises the real exchange rate and decreases net exports.
D) lowers the real exchange rate.

Question

Quizplus · Accepted Answer

In a small open economy, a policy that lowers imports reduces the supply of domestic currency in the foreign exchange market, leading to an appreciation of the real exchange rate. However, net exports remain unchanged because the decrease in imports is offset by the appreciation, which makes exports less competitive.

In the Basic Model of a Small Open Economy,if the Government