In a Small Open Economy with a Floating Exchange Rate

Multiple Choice

In a small open economy with a floating exchange rate, a rise in government spending in the new short-run equilibrium:

A) chokes off investment, but not by as much as the new government spending.
B) chokes off an amount of investment just equal to the new government spending.
C) attracts foreign capital, thus raising the exchange rate and reducing net exports, but not by as much as the new government spending.
D) attracts foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to the new government spending.