If a small open economy reduces its budget deficit,the result will be
A) a lower world real interest rate, but no change in the domestic real interest rate.
B) a lower domestic real interest rate, but no change in the world real interest rate.
C) lower domestic and world real interest rates.
D) no change in either the domestic or world real interest rate.

Question

Quizplus · Accepted Answer

In a small open economy, domestic interest rates are determined by the world interest rate. Reducing the budget deficit does not affect the world interest rate, so neither the domestic nor the world interest rate changes.

If a Small Open Economy Reduces Its Budget Deficit,the Result