An increase in the real interest rate outside of Canada will cause the dollar to ________ relative to other currencies and ________ net exports and real GDP.
A) appreciate; increase
B) appreciate; reduce
C) depreciate; increase
D) depreciate; reduce

Question

Quizplus · Accepted Answer

An increase in the real interest rate outside of Canada will make foreign investments more attractive, leading to an increase in demand for foreign currency, and thus a depreciation of the Canadian dollar (Choice C). A depreciation of the Canadian dollar will result in an increase in net exports, as Canadian exports become cheaper for foreign buyers. The increase in net exports will result in an increase in real GDP.

An Increase in the Real Interest Rate Outside of Canada