An appreciation of the real exchange rate in the basic model of a small open economy could be the result of:
A) an increase in government spending.
B) an increase in taxes.
C) a decrease in the world interest rate.
D) the expiration of an investment tax-credit provision.

Question

Quizplus · Accepted Answer

An increase in government spending can lead to an appreciation of the real exchange rate as it increases domestic demand, potentially raising the price level and making domestic goods more expensive relative to foreign goods.

An Appreciation of the Real Exchange Rate in the Basic