A small country is a net foreign borrower and its domestic demand for loanable funds increases.Consequently,the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________.

Question

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When the domestic demand for loanable funds increases, the equilibrium interest rate in the country will also increase. As a result, the quantity of loanable funds supplied by domestic savers will increase, but the quantity demanded by domestic borrowers will also increase. The net effect is that the equilibrium quantity of loanable funds used in the country will increase. Since the country is a net foreign borrower, the increase in the equilibrium quantity of loanable funds used in the country will need to be borrowed from abroad, thus leading to an increase in the country's foreign borrowing.

A Small Country Is a Net Foreign Borrower and Its