When future labor income falls in a small open economy,it causes the current account to ________ and investment to ________.
A)fall; rise
B)rise; remain unchanged
C)fall; remain unchanged
D)rise; rise

Question

Quizplus · Accepted Answer

When future labor income falls in a small open economy, individuals are likely to save more in anticipation of lower future earnings, leading to a rise in the current account as the economy saves more or spends less on imports. Investment, however, is determined by global factors in a small open economy and remains unchanged by changes in domestic labor income expectations.

When Future Labor Income Falls in a Small Open Economy,it