# Question

Suppose that better transaction technologies are developed that reduce the domestic demand for money. Use the monetary small open-economy model to answer the following:

(a) Suppose that the exchange rate is flexible. What are the equilibrium effects on the price level and the exchange rate?

(b) Suppose that the exchange rate is flexible, and the domestic monetary authority acts to stabilize the price level. Determine how the domestic money supply changes and the effect on the nominal exchange rate.

(c) Suppose that the exchange rate is fixed. Determine the effects on the exchange rate and the price level, and determine the differences from your results in parts (a) and (b).

(a) Suppose that the exchange rate is flexible. What are the equilibrium effects on the price level and the exchange rate?

(b) Suppose that the exchange rate is flexible, and the domestic monetary authority acts to stabilize the price level. Determine how the domestic money supply changes and the effect on the nominal exchange rate.

(c) Suppose that the exchange rate is fixed. Determine the effects on the exchange rate and the price level, and determine the differences from your results in parts (a) and (b).

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