In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate:
A) rises and net exports fall.
B) and net exports both rise.
C) falls and net exports rise.
D) and net exports both fall.

Question

Quizplus · Accepted Answer

When consumer confidence falls and consumers decide to save more, they spend less on consumption, including imported goods. This decrease in demand for imports improves the trade balance, leading to a rise in net exports. Additionally, the increased savings can lead to lower domestic interest rates, encouraging a capital outflow that depreciates the domestic currency, making exports cheaper and imports more expensive. This depreciation of the real exchange rate further boosts net exports.

In a Small Open Economy, If Consumer Confidence Falls and Consumers