Question

Why do increases in the real interest rate lead to decreases in net exports, and vice versa?

Short answer

Change in real interest rate is directly related to demand of domestic currency. So, it is inversely related to exchange rate & net exports.

Step-by-step solution

Step 1. Introduction

Net exports is net amount earned through - difference between receipts from exports value & expenditure on imports value.

Real Interest rate effects the demand of a country's currency, which further impact currency's exchange rate.

Exchange rate have implication on exports & imports, as former shows the value of domestic currency in terms of other currency.

Detail Explanation 

Increase in real interest rate leads to more demand of country's currency. It implies that the currency appreciates, & its exports become expensive & imports become cheaper. Hence, the exports decrease & imports increase, finally reducing net exports.

Decrease in real interest rate leads to less demand of country's currency. It implies that the currency depreciates, & its exports become cheap & imports become expensive. Hence, the exports increase & imports decrease, finally increasing net exports.