Starting from trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will and net exports will .
A)increase; increase
B)increase; decrease
C)increase, not change
D)decrease; increase

Question

Quizplus · Accepted Answer

A fall in the world interest rate makes borrowing cheaper, leading to an increase in domestic investment. As investment increases, more resources are used domestically, reducing the amount available for export, thus decreasing net exports.

Starting from Trade Balance, If the World Interest Rate Falls