A large open economy can maintain a domestic interest rate below the foreign interest rate so long as the resulting capital account ________ is offset by an income level that produces an equal current account ________.

Question

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A large open economy can maintain a domestic interest rate below the foreign interest rate by attracting foreign capital, which results in a capital account deficit. This deficit can be offset if the domestic income level is such that it produces a current account surplus, balancing the international payments.

A Large Open Economy Can Maintain a Domestic Interest Rate