Question

If the exchange rate rises, which of the following falls in the open-economy macroeconomic model? a. desired net exports and desired net capital outflow b. desired net exports but not desired net capital outflow c. desired net capital outflow but not desired net exports d. neither desired net exports nor desired net capital outflow

Answer 1

Answer: Option(d) is correct.

Explanation:

Correct option: Neither desired net exports nor desired net capital outflow

If there is increase in the exchange rate, then there will be depreciation of the home currency. This means that now a person have to pay more for the same amount of imported goods.

The exports of a country also increases with increase in the exchange rate. So, the economy became more stronger.

And an economy rises exchange rate for stabilizing the foreign interest rate and domestic interest rate.

If the domestic interest rate is higher than the foreign interest rate then there is a inflow of capital in the home country. So, an economy increases the exchange rate to equal the foreign interest rate and domestic interest rate.