In the open-economy macroeconomic model,if a country's interest rate falls,then its
A)net capital outflow and its net exports rise.
B)net capital outflow rises and its net exports fall.
C)net capital outflow falls and its net exports rise.
D)net capital outflow and its net exports fall.

Question

Quizplus · Accepted Answer

A decrease in interest rates makes domestic assets less attractive, leading to a decrease in the demand for domestic assets and an increase in the supply of domestic currency for trade. This causes the domestic currency to depreciate relative to foreign currencies, increasing the competitiveness of domestic goods and services in international markets, thus boosting net exports. At the same time, a decrease in interest rates also encourages capital outflows, which increases net capital outflow. Therefore, when a country's interest rate falls, its net capital outflow and its net exports rise.

In the Open-Economy Macroeconomic Model,if a Country's Interest Rate Falls,then