Answer: A decrease in the interest rate increases net exports. Net exports equals the value of exports minus the value of imports. Lowering the interest rate makes U.S. securities less attractive to foreign buyers. As a result, the demand for U.S. dollars decreases because foreigners no longer need to purchase as many dollars in order to buy U.S. securities. The decrease in the demand for the U.S. dollar lowers the exchange rate on the foreign exchange market. The fall in the exchange rate makes U.S. exports less expensive to foreigners because it now takes less foreign currency to buy a U.S. dollar and hence less foreign currency to buy U.S. exports. Simultaneously, the price of U.S. imports rises to U.S. residents. Therefore U.S. exports increase and U.S. imports decrease, both of which increase net exports.
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