A large open economy reduces its investment demand.This causes the world real interest rate to ________ and the country's current account balance to ________.
A)rise; fall
B)rise; rise
C)fall; rise
D)fall; fall

Question

Quizplus · Accepted Answer

When the investment demand of a country reduces, it leads to a fall in the world real interest rate in order to maintain the balance between saving and investment globally. A lower interest rate in the country makes it less attractive for foreign investors resulting in a decrease in capital inflow, hence the current account balance rises. Therefore, the correct option is C, as the world real interest rate falls and the country's current account balance rises.

A Large Open Economy Reduces Its Investment Demand