In a small open economy, if the introduction of automatic teller machines reduces the demand for money, then net exports:
A)fall, and the real exchange rate falls.
B)fall, but the real exchange rate remains unchanged.
C)remain unchanged, but the real exchange rate falls.
D)increase, and the real exchange rate remains unchanged.

Question

Quizplus · Accepted Answer

In a small open economy, a reduction in money demand leads to a decrease in the interest rate, which can cause capital outflow, depreciating the currency. This depreciation makes domestic goods cheaper for foreigners, increasing net exports while the real exchange rate remains unchanged due to the economy's openness.

In a Small Open Economy, If the Introduction of Automatic