The real exchange rate is determined by the equality of:
A) saving and the demand for net exports.
B) investment and the demand for net exports.
C) net capital outflow and the demand for net exports.
D) the negative value of net capital outflow and the demand for net exports.

Question

Quizplus · Accepted Answer

The real exchange rate is determined by the equality of net capital outflow and the demand for net exports. Net capital outflow refers to the difference between the domestic investment and domestic saving. If a country's domestic investment exceeds its domestic saving, it will have a net outflow of capital, which then needs to come from the foreign borrowing or selling of assets to foreigners. This demand for net exports, along with net capital outflow, will then determine the real exchange rate. Therefore, option C is correct.

The Real Exchange Rate Is Determined by the Equality Of