Question

If U.S. citizens decide to save a larger fraction of their incomes, the real interest rate

a. decreases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases.
b. decreases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases.
c. increases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases.
d. increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases.

Answer 1

The correct answer is c. increases, the real exchange rate of the dollar appreciates, and US net capital outflow decreases.

Step-by-step explanation:

If theoretically, the propensity to consumption drops and the US citizen decide to save money, the new interest rate of equilibrium goes up. A higher interest rate attracts foreign investors that start bringing their money to US. In relative terms, the US dollar is appreciated as a consequence of the new streams of capital flow enter the country. If anything else is happening and in the international flows of capital are coming to US, then the net capital decreases