If Canadian citizens decide to save a larger fraction of their incomes, which statement would best identify the effects?
A) The real interest rate decreases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow increases.
B) The real interest rate decreases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow decreases.
C) The real interest rate increases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow decreases.
D) The real interest rate increases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow increases.

Question

Quizplus · Accepted Answer

When Canadian citizens save more, the supply of loanable funds increases, leading to a decrease in the real interest rate. A lower real interest rate makes Canadian assets less attractive, leading to a depreciation of the Canadian dollar. This depreciation makes Canadian goods cheaper abroad, increasing exports and decreasing imports, which increases net capital outflow.

If Canadian Citizens Decide to Save a Larger Fraction of Their