If government policy encouraged households to save more at each interest rate,then
A)the real exchange rate and net exports would rise.
B)the real exchange rate and net exports would fall.
C)the real exchange rate would rise and net exports would fall.
D)the real exchange rate would fall and net exports would rise.

Question

Quizplus · Accepted Answer

When households save more, the supply of loanable funds in the economy increases and interest rates fall. Lower interest rates lead to a decrease in the demand for domestic currency, causing it to depreciate. The lower exchange rate makes exports cheaper and imports more expensive, leading to an increase in net exports. Hence, the real exchange rate would fall and net exports would rise.

If Government Policy Encouraged Households to Save More at Each