If there is a decrease in taxes on business firms in a small open economy,it causes the current account to ________ and the equilibrium amount of saving to ________.
A)fall; fall
B)rise; remain unchanged
C)fall; remain unchanged
D)rise; fall

Question

Quizplus · Accepted Answer

A decrease in taxes on business firms typically leads to an increase in investment demand. In a small open economy, this can lead to an increase in the demand for foreign capital to finance the additional investment, which can result in a deterioration of the current account (i.e., the current account falls). However, the equilibrium amount of saving in the economy remains unchanged because the change in taxes directly affects investment rather than saving behavior.

If There Is a Decrease in Taxes on Business Firms