In a small open economy, policies that increase:
A) investment tend to cause a trade surplus.
B) investment tend to cause a trade deficit.
C) saving do not affect the trade balance.
D) saving tend to cause a trade deficit.

Question

Quizplus · Accepted Answer

In a small open economy, policies that increase investment tend to cause a trade deficit because when there is an increase in investment, it leads to an increase in imports of capital goods. This is because the country may not have the capacity to produce all the capital goods required for investment. As the imports of capital goods increase, it leads to an increase in the current account deficit, causing a trade deficit.

In a Small Open Economy, Policies That Increase