A higher interest rate
A)causes the exchange rate to increase, which causes the share of net exports to rise.
B)causes the exchange rate to fall, which results in a decline in the share of net exports.
C)causes the exchange rate to fall, which causes the share of net exports to rise.
D)causes the exchange rate to increase, which results in a decline in the share of net exports.
E)has an uncertain effect on both exchange rates and the share of net exports.

Question

Quizplus · Accepted Answer

A higher interest rate typically attracts foreign capital, causing the domestic currency to appreciate (exchange rate to increase). This makes domestic goods more expensive abroad, leading to a decline in net exports.

A Higher Interest Rate