In a short-run model of a large open economy with a floating exchange rate, net capital outflow ______ as the domestic interest rate increases and is just equal to ______.
A) decreases; the increase in net exports.
B) decreases; the decrease in net exports.
C) increases; the increase in net exports.
D) increases; the decrease in net exports.

Question

Quizplus · Accepted Answer

In a large open economy with a floating exchange rate, an increase in the domestic interest rate makes domestic assets more attractive, leading to a decrease in net capital outflow. This decrease in net capital outflow corresponds to a decrease in net exports, as the currency appreciates, making exports more expensive and imports cheaper.

In a Short-Run Model of a Large Open Economy with a Floating