A17 Consider an open economy framework. Suppose that American products became mo

Question

A17

Consider an open economy framework. Suppose that American products became more popular, so there is an increase in the demand for American exports. In equilibrium, this will result in

an increase in the trade balance a fall in net capital outflow and a rise in the real exchange rate

a fall in the trade balance, a fall in net capital outflow, and a rise in the real exchange rate.

A fall in the trade balance, a fall in net capital outflow and a fall in the real exchange rate.

No change in the trade balance, an increase in net capital outflow, and a rise in the real exchange rate

None of the above

Please provide explaination

Explanation / Answer

Ans is A

Trade balance=Export-Import

An increase in demand of net export will improve trade balance, which increases dollar demand and a rise in real exchange rate pf dollar and thus net capital outflow.

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