Question

In a short-run model of a large open economy with a floating exchange rate, net capital outflow ______ as the domestic interest rate increases and is just equal to the ______ in net exports. Group of answer choices increases; decrease decreases; increase increases; increase decreases; decrease

Answer 1

1. decreases

2. decrease

Step-by-step explanation:

When Domestic interest rate increases, as a result of floating exchange rate, the net capital outflow decreases which in turn leads to most goods to be used internally, instead of exporting it abroad, there by reducing the level of exports.

Hence, All things being equal, it is assumed or believed that, In a short-run model of a large open economy with a floating exchange rate, net capital outflow DECREASES as the domestic interest rate increases and is just equal to the DECREASE in net exports.