In a small open economy,if domestic saving exceeds domestic investment,then the extra saving will be used to:
A) make loans to the government.
B) make loans to foreigners.
C) repay the national debt.
D) repay loans to the Bank of Canada.

Question

Quizplus · Accepted Answer

If domestic saving exceeds domestic investment, the extra saving will be used to make loans to foreigners, which increases the demand for the domestic currency and leads to the appreciation of the exchange rate. This can also lead to an increase in imports and a decrease in exports, which can have mixed effects on the domestic economy. Option A, making loans to the government, is irrelevant to the given scenario as there is no mention of government borrowing or fiscal policy. Option C, repay national debt, is not possible as the scenario only refers to a situation where saving exceeds investment, not expenditure. Option D, repay loans to the Bank of Canada, is unnecessary in this scenario since there is no indication that the economy has any debt obligations to the central bank.

In a Small Open Economy,if Domestic Saving Exceeds Domestic Investment,then