In a two-country world,many economists argue that an increase in the real interest rate in the domestic economy (relative to the real interest rate in the foreign economy)

Question

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An increase in the real interest rate in the domestic economy will likely lead to an increase in the demand for the domestic currency which will appreciate the currency value. This will make exports more expensive and import cheaper, thereby leading to a decrease in net exports. Since net exports are a component of GDP, a decrease in net exports will likely lead to a decrease in domestic Real GDP.

In a Two-Country World,many Economists Argue That an Increase in the Real