Assume the economy is in equilibrium. If the interest rate falls, what sequence of events will return the economy to equilibrium?
A) Total spending rises as investors move funds into foreign assets, causing the exchange rate to rise (depreciate), and the trade balance increases, causing output to rise.
B) Savers save more to replace lost interest earnings, consumption falls, imports rise, and the trade balance falls, causing output to fall.
C) Total spending falls, unemployment rises, government transfers increase, inflation rises, and the exchange rate falls (appreciates).
D) Bond prices rise, causing foreign investment to flow in, causing the exchange rate to fall (appreciate).
Ans: A) Total spending rises as investors move funds into foreign assets, causing the exchange rate to rise (depreciate), and the trade balance increases, causing output to rise.
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