ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Net exports will increase
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Net exports will fall
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Net exports are unaffected in the long run
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Net exports will go into deficit
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Detailed explanation-1: -The real exchange rate: – represents the rate at which domestic goods can be traded for foreign goods; – affects a country’s net export. The higher the real exchange rate is, the lower a country’s net exports will be.
Detailed explanation-2: -Net Exports and the Real Exchange Rate Thus, when the real exchange rate is high, net exports decrease as imports rise. Alternatively, when the real exchange rate is low, net exports increase as exports rise.
Detailed explanation-3: -If the dollar depreciates (the exchange rate falls), the relative price of domestic goods and services falls while the relative price of foreign goods and services increases.
Detailed explanation-4: -The real exchange rate is related to net exporters. When the real exchange rate is lower, domestic goods are less expensive relative to foreign goods and net exports are greater. The trade balance (net exports) must equal the net capital outflow (which is savings minus investment).