In an open economy, the domestic real interest rate is determined by:
A)domestic saving
B)domestic investment
C)domestic saving and domestic investment
D)domestic saving, domestic investment and net capital inflows

Question

Quizplus · Accepted Answer

In an open economy, the domestic real interest rate is determined by the interaction of domestic saving, domestic investment, and net capital inflows. Net capital inflows refer to the difference between foreign investment in the domestic economy and domestic investment abroad. The higher the net capital inflows, the greater the supply of loanable funds, leading to a decrease in the domestic real interest rate. Conversely, if there is a decrease in net capital inflows, it will lead to a decrease in the supply of loanable funds, leading to an increase in the domestic real interest rate. Therefore, domestic saving, domestic investment, and net capital inflows all play a role in determining the domestic real interest rate in an open economy.

In an Open Economy, the Domestic Real Interest Rate Is