A small country is a net foreign lender and its supply of loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country and the countryʹs foreign lending .
A) does not change; does not change
B) does not change; increases
C) increases; does not change
D) increases; decreases

Question

Quizplus · Accepted Answer

When a small country is a net foreign lender and its supply of loanable funds increases, the equilibrium interest rate will decrease. As a result, domestic borrowers will demand more loanable funds, but foreign borrowers will demand less. However, since the country is a net foreign lender, the increase in domestic lending will not fully offset the decrease in foreign borrowing, leading to an overall increase in the amount of loanable funds lent to foreign countries. Therefore, the equilibrium quantity of loanable funds used in the country does not change, but the country's foreign lending increases.

A Small Country Is a Net Foreign Lender and Its