When interest rates rise in the United States, what is the effect on net exports and aggregate expenditure?
A)Inflows of foreign savings cause the dollar to depreciate, and this increases exports and reduces imports, leading to a rise in net exports and a rise in aggregate expenditure.
B)Government expenditure rises, and this increases imports, net exports, and aggregate expenditure.
C)The real value of savings increases, leading to increased imports and decreased exports, and this causes net exports and aggregate expenditure to fall.
D)Inflows of foreign savings cause the dollar to appreciate, and this reduces exports and increases imports, leading to a fall in net exports and a fall in aggregate expenditure.

Question

Quizplus · Accepted Answer

When interest rates rise in the United States, it attracts foreign capital seeking higher returns, causing the dollar to appreciate. An appreciated dollar makes U.S. exports more expensive and imports cheaper, reducing exports and increasing imports. This leads to a decrease in net exports and a consequent fall in aggregate expenditure.

When Interest Rates Rise in the United States, What Is