Domestic macroeconomic variables

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Consider the case of a small open economy with a fixed exchange rate, perfect capital mobility (i.e., interest parity holds), and complete price stability (no ongoing inflation). Explain what effect a decrease in the world interest rate would have on the following domestic macroeconomic variables:

a. The stock of foreign exchange reserves.

b. The money supply.

c. Real GDP.

d. The price level.

e. The real exchange rate.

Reference no: EM132484711

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