In a large open economy, an increase in productivity will lead in the long run to
A)an increase in the real interest rate.
B)an increase in the current account balance.
C)an increase in the price level.
D)a decrease in investment spending.

Question

Quizplus · Accepted Answer

An increase in productivity leads to an increase in the production capacity and output of the economy. This, in turn, leads to an increase in exports and a decrease in imports as the country becomes more competitive in the international market. This increase in net exports leads to an increase in the current account balance. Therefore, the correct answer is B.

In a Large Open Economy, an Increase in Productivity Will