To extend the short run to include a more sophisticated version of the trade balance,we include:

Question

Quizplus · Accepted Answer

The gap between the domestic and foreign real interest rates is an important factor in determining the trade balance in the short run as it affects the demand and supply of foreign exchange. When the domestic real interest rate is higher than the foreign real interest rate, it attracts capital inflows, leading to an appreciation of the domestic currency and a worsening of the trade balance. Conversely, when the domestic real interest rate is lower than the foreign real interest rate, it leads to capital outflows, causing a depreciation of the domestic currency and an improvement in the trade balance. Foreign income, changes in the money supply, and the gap between domestic and foreign inflation rates are important factors in the long run determination of the trade balance, but not in the short run.

To Extend the Short Run to Include a More Sophisticated