A decrease in the real interest rate will cause exports to

A decrease in the real interest rate will cause exports to _____ (decrease or increase) and imports to ____ (decrease or increase)

An increase in the interest rate will cause:

Solution

When the real interest rate decreases, domestic export becomes cheaper for foreigners and imports become expensive for domestic purchasers.

Therefore, export will increase and import will decrease.

An increase in interest rate will increase the cost of borrowing, which will cause business to decrease investment spending. Also, increase in interest rate makes domestic export expensive for foreigners and imports become cheaper for domestic purchasers. Export decreases, import increases and as a result, net export declines.

Answer- option A