If the world real interest rate were to fall below the rate at which domestic saving and investment would be equal ________.
A)saving would be greater than investment so the economy would be running a trade deficit
B)investment would be greater than saving so the economy would be running a trade deficit
C)investment would be greater than saving so the economy would be running a trade surplus
D)saving would be greater than investment so the economy would be running a trade surplus
E)none of the above

Question

Quizplus · Accepted Answer

When the real interest rate falls below the rate at which domestic saving and investment would be equal, it implies that borrowing has become cheaper and more attractive for businesses and individuals. This leads to an increase in investment demand, which exceeds the available domestic saving. As a result, the country would need to borrow from abroad and, therefore, run a trade deficit. This happens because the excess investment demand is met by importing capital, which requires foreign currency. Running a trade deficit allows for the country to get the necessary foreign currency to finance the additional investment.

If the World Real Interest Rate Were to Fall Below