If the information technology boom increases investment demand in a small open economy, then net exports ______ and the real exchange rate ______.
A) increase; appreciates
B) increase; depreciates
C) decrease; appreciates
D) decrease; depreciates

Question

Quizplus · Accepted Answer

In a small open economy, an increase in investment demand due to the information technology boom would lead to an increase in the demand for loanable funds, which typically results in a higher interest rate. This attracts foreign capital, appreciating the domestic currency, making exports more expensive and imports cheaper, thus decreasing net exports.

If the Information Technology Boom Increases Investment Demand in a Small