In a large open economy, the real interest rate does not have to fall by as much in order to restore equilibrium in the goods market in response to an increase in domestic output because
A)the IS curve is steeper.
B)some of the increase in desired domestic saving flows abroad.
C)the increase in desired domestic saving is smaller.
D)foreigners will decrease their demand for domestically produced goods.

Question

Quizplus · Accepted Answer

In a large open economy, some of the increase in desired domestic saving flows abroad. This means that there is a decreased pressure on the domestic interest rate to fall to stimulate investment and restore equilibrium in the goods market. As a result, the real interest rate does not have to fall by as much as it would in a closed economy.

In a Large Open Economy, the Real Interest Rate Does