If we observe an economy in which desired saving has changed,but there has been no change in actual investment,we may infer that ________.
A)this is a closed economy
B)this is a large economy
C)the trade balance has changed in the same direction as the change in desired saving
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

According to the saving-investment equality, if desired saving has increased but actual investment has not changed, then there will be an excess of saving in the economy. This excess saving must be used to finance some other kind of spending in the economy. One possibility is that the trade balance (the difference between exports and imports) has changed in the same direction as the change in desired saving. Specifically, if desired saving has increased, then it is possible that the trade balance has shifted towards a larger surplus, indicating that the country is exporting more than it is importing and using the excess saving to invest abroad or accumulate foreign assets. Therefore, option C is the correct answer. Option A and B are not relevant to the given information, and option D is too broad and includes irrelevant information. Option E is not correct as there must be some change that has caused the desired savings to change in the first place.

If We Observe an Economy in Which Desired Saving Has