In the monetary small open-economy model with a flexible exchange rate,an increase in the domestic price level has which impact on domestic money demand?
A) It increases it.
B) It decreases it.
C) It has no impact.
D) It depends.

Question

Quizplus · Accepted Answer

An increase in the domestic price level increases the demand for money as individuals require more money to transact at the higher price level. This is because the higher price level increases the nominal value of transactions, thereby increasing the demand for money to facilitate these transactions.

In the Monetary Small Open-Economy Model with a Flexible Exchange