If people have a sudden increase in confidence in the open economy of the U.S. and want to invest there, the interest rate:
A) increases, as NCO increases.
B) falls, as NCO falls.
C) falls, as NCO increases.
D) increases, as NCO decreases.

Question

Quizplus · Accepted Answer

An increase in confidence in the open economy of the U.S. leads to an increase in demand for U.S. assets by foreign investors, causing the net capital outflow (NCO) to fall. In order to finance this increase in investment, the interest rate must fall to encourage borrowing and investment. Thus, option B is correct.

If People Have a Sudden Increase in Confidence in the Open