In comparison with a closed economy, in a large open economy
A)an increase in desired saving will cause a larger decline in the domestic real interest rate.
B)the IS curve will be steeper.
C)an increase in desired investment will cause a smaller increase in the domestic real interest rate.
D)the IS curve will be horizontal at the world real interest rate.

Question

Quizplus · Accepted Answer

In a large open economy, capital can flow across borders, which means that changes in desired investment have a smaller impact on the domestic real interest rate compared to a closed economy. The world interest rate influences the domestic rate, moderating the effect of domestic investment changes.

In Comparison with a Closed Economy, in a Large Open