In a saving-investment diagram for a small open economy A)the saving curve is vertical at some fixed level of output. B)the saving curve is horizontal at some fixed interest rate. C)the real interest rate is fixed at the world real interest rate. D)equilibrium requires that S^d = I^d.

Question

Quizplus · Accepted Answer

In a small open economy, the real interest rate is fixed at the world real interest rate because small open economies are price takers in the world financial markets, meaning they cannot influence the world interest rate and must adapt to it.

In a Saving-Investment Diagram for a Small Open Economy