In the two-period SOE model, if the real interest rate decreases and the current account is initially in deficit, then

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Quizplus · Accepted Answer

In the two-period SOE model, a decrease in the real interest rate leads to a depreciation of the exchange rate, making exports relatively cheaper and imports relatively more expensive. This leads to an increase in net exports, which improves the current account balance. Therefore, if the current account is initially in deficit, a decrease in the real interest rate will cause the current account surplus to rise, not the deficit to fall. Thus, the correct answer is E, the current account surplus falls.

In the Two-Period SOE Model, If the Real Interest Rate