Assuming the usual relationship between the real exchange rate and the interest rate, the net exports should display
A) a negative correlation with both GDP and the interest rate.
B) a negative correlation with GDP and a positive correlation with the interest rate.
C) a positive correlation with both GDP and the interest rate.
D) a positive correlation with GDP and a negative correlation with the interest rate.
E) a positive correlation with GDP and no significant correlation with the interest rate.

Question

Quizplus · Accepted Answer

Net exports typically have a negative correlation with GDP because as GDP increases, domestic consumption tends to increase, leading to more imports and potentially decreasing net exports. Similarly, net exports have a negative correlation with the interest rate because higher interest rates can appreciate the domestic currency, making exports more expensive and imports cheaper, thus potentially decreasing net exports.

Assuming the Usual Relationship Between the Real Exchange Rate and the Interest