If business taxes rise in a large open economy,it causes the current account to ________ and saving to ________.
A)fall; fall
B)rise; remain unchanged
C)fall; remain unchanged
D)rise; fall

Question

Quizplus · Accepted Answer

An increase in business taxes will lead to a decrease in the after-tax profit of firms, resulting in a decrease in their investment. The reduction in investment will lead to a decrease in national saving, as fewer resources are allocated towards saving. A fall in national saving will reduce the supply of funds available to borrow, leading to an increase in the interest rates. The higher interest rates will, in turn, attract more foreign investment, which will appreciate the exchange rate. A higher exchange rate will make exports more expensive and imports cheaper, leading to an increase in imports and a decrease in exports. The combination of a decreased supply of domestic goods and an increase in cheaper foreign goods will lead to an increase in the current account deficit.

If Business Taxes Rise in a Large Open Economy,it Causes