Question

The Fed can ________ net exports by ________ domestic interest rates. Group of answer choices A. increase; raising B. decrease; keeping constant C. decrease; lowering D. increase; lowering

Answer 1

When Fed decrease interest rate, then there will be outflow of capital from the domestic country. So demand for foreign currency increase, so domestic currency will depreciate and foreign currency appreciate. Hence domestic goods and services becomes cheaper relative to the foreign goods and services. Hence export increase and import decrease. So net export increase.

Hence it can be said the Fed can increase net export by lowering domestic interest rates.

Hence option D is the correct answer.