A small open economy increases its desired saving.This causes the world real interest rate to ________ and the country's current account balance to ________.
A)fall; fall
B)remain unchanged; rise
C)fall; rise
D)remain unchanged; fall

Question

Quizplus · Accepted Answer

When a small open economy increases its desired saving, it does not affect the world real interest rate because the economy is too small to influence global markets. However, increased saving reduces domestic consumption and investment demand, leading to a rise in the country's current account balance as it exports more than it imports.

A Small Open Economy Increases Its Desired Saving