Assignment 2: The Net Exports Effect

The “net exports effect” is the impact on a country’s total spending caused by an inverse relationship between the price level and the net exports of an economy. Using this principle, discuss how the following economic variables change during an economic expansion:

• The balance of payments
• The rate of interest
• The value of the dollar

In your answer, also discuss the case in the context of both a flexible exchange rate and a fixed exchange rate.