In a country where output equals consumption and I and G are zero, a new investment holds the prospect of permanently increasing output and, thus, consumption. Based on this information, which of the following statements is correct?
A) If it is a closed economy, then there is a better prospect for investment and consumption smoothing than in an open economy.
B) If it is an open economy, then it is better for the economy to borrow externally to pay for the investment.
C) If it is a closed economy, then the increase in investment can be achieved without sacrificing consumption.
D) If it is an open economy, then it will result in more fluctuations in output and consumption.

Question

Quizplus · Accepted Answer

In an open economy, borrowing externally can finance the investment without reducing current consumption, allowing for consumption smoothing.

In a Country Where Output Equals Consumption and I and G