Assume that an increase in Costa Rica's government budget deficit reduced desired national saving by 10 million colon.Assuming Costa Rica is a small open economy,you would expect the government's action to
A)increase the current account balance by exactly 10 million colon.
B)increase the current account balance by less than 10 million colon.
C)reduce the current account balance by exactly 10 million colon.
D)reduce the current account balance by more than 10 million colon.

Question

Quizplus · Accepted Answer

In a small open economy, the government's budget deficit increases the demand for loanable funds, which leads to an increase in the interest rate. As a result, the currency appreciates, making exports more expensive and imports cheaper, leading to a reduction in net exports. The reduction in net exports is precisely equal to the increase in national saving, which is 10 million colon in this case. Therefore, the current account balance would reduce by 10 million colon, as stated in option C.

Assume That an Increase in Costa Rica's Government Budget Deficit