If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the real exchange rate is determined by the intersection of the ______ net-exports schedule and the ______ line representing saving minus investment.
A) downward-sloping; vertical
B) upward-sloping; vertical
C) downward-sloping; upward-sloping
D) upward-sloping; downward-sloping

Question

Quizplus · Accepted Answer

The real exchange rate is determined by the intersection of the downward-sloping net-exports schedule (as an increase in net exports leads to an increase in demand for domestic currency and therefore, its value) and the vertical line representing saving minus investment (as the overall level of saving and investment in the economy does not affect the level of net exports and therefore does not impact the real exchange rate).

If a Graph Is Drawn with Net Exports on the Horizontal