Question

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate: Group of answer choices will rise, and net exports will fall. will fall, and net exports will rise. and net exports will both fall. and net exports will both rise.

Answer 1

Answer: the U.S. real interest rate and net exports will both rise.

Explanation: Due to the ongoing war abroad, there would be a reduction in production of goods and services in the affected countries and a rise in the production of goods and services in the safe haven country (US) leading to increased levels of export to meet the demand.

War affects investments negatively. As a result, investments are also moved to the US for safety. However, pressure on US producers and eventual shortage due to increased exports, would lead to inflation and increase in prices of goods and services. To mitigate these effects and to reduce the supply of money, government would increase interest rates.

This explains why both interest rates and export both rise.