An increase in the trade surplus of a small open economy could be the result of:
A) a domestic tax cut.
B) an increase in government spending.
C) a decrease in the world interest rate.
D) the implementation of an investment tax-credit provision.

Question

Quizplus · Accepted Answer

An increase in the trade surplus of a small open economy indicates that its exports have increased or its imports have decreased. A decrease in the world interest rate would lead to a decrease in the foreign savings, which, in turn, would lead to a depreciation in the exchange rate of the small open economy. This depreciation would improve competitiveness and lead to an increase in exports and a decrease in imports, resulting in an increase in the trade surplus. However, choices A, B, and D do not directly affect the trade surplus and are not the best answers.

An Increase in the Trade Surplus of a Small Open