A decrease in the real interest rate in the U.S. will cause net exports to:
A) increase because exports will remain constant but imports will decrease.
B) decrease because exports will decrease and imports will increase.
C) decrease because exports will increase but imports will increase.
D) increase because exports will increase and imports will decrease.

Question

Quizplus · Accepted Answer

A decrease in the real interest rate in the U.S. will make U.S. goods and services relatively less expensive for foreign consumers, therefore increasing demand for exports. At the same time, a decrease in the real interest rate will discourage saving and encourage borrowing, which will increase consumption and investment spending in the U.S. This will result in an increase in imports. Therefore, net exports will increase because exports will increase more than imports.

A Decrease in the Real Interest Rate in the U