An increase in the trade surplus of a small open economy could be the result of:
A) a domestic tax cut.
B) an increase in government spending.
C) an increase in the world interest rate.
D) the implementation of an investment tax-credit provision.

Question

Quizplus · Accepted Answer

An increase in the world interest rate could lead to an increase in the inflow of foreign capital into the small open economy, which would increase the demand for the country's currency and therefore appreciate its value. This would make exports more expensive and imports cheaper, leading to an increase in the trade surplus. Choices A, B, and D are all domestic policies that would not directly affect the trade surplus.

An Increase in the Trade Surplus of a Small Open