An increase in saving shifts the (S – I) schedule to the right, increasing the supply
of dollars available to be invested abroad, as in Figure 5–3. The increased supply
of dollars causes the equilibrium real exchange rate to fall from 1 to 2. Because
the dollar becomes less valuable, domestic goods become less expensive relative to
foreign goods, so exports rise and imports fall. This means that the trade balance
increases. The nominal exchange rate falls following the movement of the real
exchange rate, because prices do not change in response to this shock.