In an open economy,an increase in savings because of concerns about the future should cause the domestic real interest rate to ________ and should cause net exports to ________.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question

Quizplus · Accepted Answer

In an open economy, an increase in savings due to concerns about the future would typically lead to a decrease in the domestic real interest rate, as the supply of loanable funds increases. This decrease in the interest rate makes domestic investments cheaper, potentially reducing the incentive for capital to flow abroad, thereby affecting the currency value and making exports relatively cheaper and imports more expensive. Consequently, net exports are likely to rise.

In an Open Economy,an Increase in Savings Because of Concerns