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

Question

Quizplus · Accepted Answer

An increase in taxes on business firms typically leads to a decrease in domestic investment demand. In a small open economy, this can lead to an increase in the current account balance, as less investment means more of the domestic saving is available for lending abroad. However, the equilibrium quantity of saving remains unchanged because it is determined by domestic factors such as income and interest rates, which are not directly affected by the tax increase on firms.

If There Is an Increase in Taxes on Business Firms