If the information technology boom increases investment demand in the basic model of a small open economy,then net exports ______ and the real exchange rate ______.
A) increase; appreciates
B) increase; depreciates
C) decrease; appreciates
D) decrease; depreciates

Question

Quizplus · Accepted Answer

In a small open economy, an increase in investment demand leads to higher demand for loanable funds, which increases the interest rate. This attracts foreign capital, causing the domestic currency to appreciate. As a result, net exports decrease because domestic goods become more expensive for foreign buyers.

If the Information Technology Boom Increases Investment Demand in the Basic