Starting from a trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____ and net exports will _____.
A) increase; increase
B) increase; decrease
C) increase, not change
D) decrease; increase

Question

Quizplus · Accepted Answer

A fall in the world interest rate makes borrowing cheaper, leading to an increase in domestic investment. As a result, more resources are used domestically, reducing the amount available for export, thus decreasing net exports.

Starting from a Trade Balance, If the World Interest Rate