A very small country is an international borrower. Its supply of loanable funds increases but it still remains a net foreign borrower. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________.

Question

Quizplus · Accepted Answer

An increase in the supply of loanable funds should lead to a decrease in the equilibrium interest rate in the small country, attracting more foreign borrowers. However, since the country is still a net foreign borrower, it means that it is borrowing more funds from abroad than it is lending domestically. Therefore, even though the quantity of loanable funds used in the country could increase, the amount of foreign borrowing would decrease as the country would be borrowing less than before, but still more than it is lending domestically.

A Very Small Country Is an International Borrower