If the government of Barbados implemented a policy that reduced national saving, which statement would best predict the consequences?
A) Its real exchange rate would depreciate, and Barbadian net exports would rise.
B) Its real exchange rate would depreciate, and Barbadian net exports would fall.
C) Its real exchange rate would appreciate, and Barbadian net exports would rise.
D) Its real exchange rate would appreciate, and Barbadian net exports would fall.

Question

Quizplus · Accepted Answer

A reduction in national saving would lead to a decrease in the supply of loanable funds, which would increase interest rates. Higher interest rates would attract foreign capital, appreciating the real exchange rate. An appreciated real exchange rate makes domestic goods more expensive relative to foreign goods, reducing net exports.

If the Government of Barbados Implemented a Policy That Reduced