Question

In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate:______. a. and net exports both fall. b. rises, and net exports fall. c. and net exports both rise. d. falls, and net exports rise.

Answer 1

Answer:

D. Falls, and net export rises.

Explanation:

When consumers decide to save more in a given economy due to consumer's confidence falling, the net export rises as producers and sellers would seek alternative measures in trying to sell their goods and services. So they begin to export their goods and services in order to offset the decrease in demand for that good or service locally.

Also, real exchange rate will also fall. This is as a result of increase in exportation and reduction in the prices of export.