In a small open economy, if the government encourages investment, through, say, an investment tax credit, investment:

Question

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In a small open economy, an increase in investment leads to an increase in demand for loanable funds, which leads to an increase in the interest rate. This increase in interest rate attracts foreign capital, as investors seek to take advantage of higher interest rates in the domestic economy compared to other economies. This inflow of foreign capital then finances the increase in investment, leading to a higher level of investment in the economy.

In a Small Open Economy, If the Government Encourages Investment