Why do increases in the real interest rate lead to decreases in net exports, and

Question

Why do increases in the real interest rate lead to decreases in net exports, and vice versa?

A.Rises in the real interest rate lead to a lower value of the dollar, which in turn leads to a decline in net exports.

B.Interest rate rises lead to pessimistic expectations about the value of the dollar, which causes net exports to fall.

C.Rises in the real interest rate lead to a higher value of the dollar, which in turn leads to a decline in net exports.

D.This situation is usually not the case; interest rates and net exports are positively related so net exports will rise.

Explanation / Answer

Ans is C: Rises in the real interest rate lead to a higher value of the dollar, which in turn leads to a decline in net exports

Rise in real interest rates increases the demands for domestic products/ assets which in turn appricaites the local currency hence importing becomes cheaper and exporting becomes dearer thus less exporting.

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