In the basic model of a small open economy,if consumer confidence falls and consumers decide to save more,then the real exchange rate:
A) rises and net exports fall.
B) and net exports both rise.
C) falls and net exports rise.
D) and net exports both fall.

Question

Quizplus · Accepted Answer

When consumer confidence falls, consumers save more, leading to a decrease in domestic consumption. This results in a lower demand for domestic goods, causing the real exchange rate to fall. As the real exchange rate falls, domestic goods become cheaper for foreign buyers, leading to an increase in net exports.

In the Basic Model of a Small Open Economy,if Consumer