In a Small Open Economy with a Floating Exchange Rate

Multiple Choice

In a small open economy with a floating exchange rate, the supply of real money balances is fixed and a rise in government spending:

A) raises the interest rate, so that income must rise to maintain equilibrium in the money market.
B) raises the interest rate so that net exports must fall to maintain equilibrium in the goods market.
C) cannot change the interest rate so that net exports must fall to maintain equilibrium in the goods market.
D) cannot change the interest rate so income must rise to maintain equilibrium in the money market.