If the government of India implemented a policy that decreased national saving,its real exchange rate would
A)depreciate and Indian net exports would rise.
B)depreciate and Indian net exports would fall.
C)appreciate and Indian net exports would rise.
D)appreciate and Indian net exports would fall.

Question

Quizplus · Accepted Answer

A decrease in national saving would result in a decrease in the supply of loanable funds, leading to an increase in interest rates. This would cause an influx of foreign capital, increasing the demand for Indian currency and thus appreciating its exchange rate. An appreciation of the exchange rate would result in a decrease in net exports, as Indian goods and services would become relatively more expensive for foreigners. Therefore, the correct answer is D (appreciate and Indian net exports would fall).

If the Government of India Implemented a Policy That Decreased