An increase in autonomous investment in a small open economy will cause ________.
A)a trade surplus to shrink
B)a trade deficit to increase
C)lower net capital outflows
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

An increase in autonomous investment will lead to an increase in aggregate demand, which will in turn lead to an increase in imports and a decrease in exports. This will cause the trade deficit to increase. Additionally, the increase in investment will lead to an increase in the demand for loanable funds, which will drive up interest rates. This will make it more attractive for domestic residents to invest in domestic assets, leading to lower net capital outflows.

An Increase in Autonomous Investment in a Small Open Economy