An appreciation of the real exchange rate in a small open economy could be the result of:
A) an increase in government spending.
B) an increase in taxes.
C) a decrease in the world interest rate.
D) the expiration of an investment tax-credit provision.

Question

Quizplus · Accepted Answer

An increase in government spending can lead to an appreciation of the real exchange rate by increasing domestic demand, which can raise the price level and make domestic goods more expensive relative to foreign goods.

An Appreciation of the Real Exchange Rate in a Small