A large 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

If a large open economy increases its desired saving, it implies it will consume less and save more. This increased savings will increase the supply of loanable funds in the world economy, leading to a fall in the world real interest rate. A fall in the world real interest rate will make domestic investments less attractive than foreign investments, leading to an increase in capital outflow and a rise in the current account balance. Therefore, the correct answer is C, i.e., fall in the world real interest rate and a rise in the country's current account balance.

A Large Open Economy Increases Its Desired Saving