For a small economy in a flexible exchange rate system that begins in the long-run equilibrium point, a higher rate of inflation in the short run will be followed by
A. An increase in the exchange rate and decline in net exports.
B. Decrease in the exchange rate and an increase in net exports.
C. Contractionary monetary policy and real exchange rate appreciation.
D. Explanatory monetary policy and real exchange rate depreciation.
Answer:C
For a small economy in a flexible exchange rate system that begins in the long-run equilibrium point, a higher rate of inflation in the short run will be followed by
A. An increase in the exchange rate and decline in net exports. B. Decrease in the exchange rate and an increase in net exports. C. Contractionary monetary policy and real exchange rate appreciation. D. Explanatory monetary policy and real exchange rate depreciation.