If the government of Kenya implemented a policy that decreased national saving, its real exchange rate would
A)depreciate and Kenyan net exports would rise.
B)depreciate and Kenyan net exports would fall.
C)appreciate and Kenyan net exports would rise.
D)appreciate and Kenyan net exports would fall.

Question

Quizplus · Accepted Answer

If the government of Kenya implements a policy that decreases national saving, it will lead to a decrease in the supply of loanable funds. With a decrease in the supply of loanable funds, interest rates will rise, making domestic goods less competitive than foreign goods. As a result, the demand for domestic goods and services will decrease, leading to a decrease in net exports. The decrease in net exports will cause a surplus of domestic currency in the foreign exchange market, leading to an appreciation of the Kenyan shilling. Therefore, the real exchange rate would appreciate, and Kenyan net exports would fall.

If the Government of Kenya Implemented a Policy That Decreased