From the time Keynes put forward his economic theories until the early sixties, the prevalent view in the economic literature was that money did not matter. Money, however, was considered, in studies by H. G. Johnson(1958), J. M. Fleming(1962), and R. Mundeli(1963, 1968), and once again became regarded as being one of the most important variables in the process of economic adjustment.
This paper deals with the effects of economic policies on a small open economy, but it differs from those past studies on the treatment of the demand for money. Following the view of S. C. Tsiang(1956, 1977), it regards money as mainly being a medium of exchange, which would have direct and impact effects on economic activities, if the quantity of money were changed.
There are some different and more interesting results with regard to the effects of prices, output, interest rates, and exchange rates, depending on the fiscal policy or monetary policy that the government adopts. It concludes with an evaluation designed to serve as useful reference for future government policy decisions.
