True or False?
The statement is true. A monetary shock in the rest of the world lowers the world real interest rate, reducing output and employment in the small country when it maintains its nominal money supply constant. An expansion of the money supply will thus be required to maintain output constant in that case. A real shock in the rest of the world raises the world real interest rate, expanding output and employment in the small country when it holds its nominal money supply constant. In that case, a contraction of the nominal money supply is required to maintain output and employment constant.