In the basic model of a small open economy,when the government reduces national saving,the equilibrium real exchange rate:
A) rises and net exports fall.
B) rises and net exports rise.
C) falls and net exports fall.
D) falls and net exports rise.

Question

Quizplus · Accepted Answer

In the basic model of a small open economy, a reduction in national saving leads to a decrease in the supply of loanable funds, which drives up the interest rate. This makes domestic assets more attractive, leading to an appreciation of the exchange rate. Consequently, net exports fall as the cost of domestic goods and services increases for foreign buyers.

In the Basic Model of a Small Open Economy,when the Government