In the monetary small open-economy model with a flexible exchange rate,an increase in the domestic money supply increases
A) domestic output, but has no effect on the domestic price level or the nominal exchange rate.
B) the domestic price level, but has no effect on domestic output or the nominal exchange rate.
C) the nominal exchange rate, but has no effect on domestic output or the domestic price level.
D) the domestic price level and the nominal exchange rate, but has no effect on domestic output.

Question

Quizplus · Accepted Answer

An increase in the domestic money supply in a small open economy with a flexible exchange rate typically leads to a depreciation of the nominal exchange rate and an increase in the domestic price level, but it does not affect domestic output in the long run.

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