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Homework answers / question archive / 1)If a country makes political reforms so that people now believe this country’s assets are less risky, what happens to its interest rate, its exchange rate, and its net exports? 2)If people in the U
1)If a country makes political reforms so that people now believe this country’s assets are less risky, what happens to its interest rate, its exchange rate, and its net exports?
2)If people in the U.S. choose to save a smaller percentage of income, what will happen to the interest rate, net capital outflow, the exchange rate, and net exports?
Answer 1:
If a country makes political reforms which makes assets are less risky, then this increases demand for the currency and return on investment will increase. This increases Net capital inflow in the currency and this increases rate of interest in the economy. As demand of the currency increases, this leads to appreciation of currency. As currency appreciates, exports will become expensive and imports will become cheaper and this reduces Net exports in the economy.
Answer 2:
When savings in the economy decreases, this will reduce supply of loanable funds in the economy. As supply of loanable funds decreases in the loanable funds, the rate of interest will increase in the economy. As rate of interest increases, the return on investment increases, this increases net capital inflow in the economy. This leads to appreciation of currency and thus lead to decrease in Net exports
