A large open economy increases its investment demand.This causes the world real interest rate to ________ and the country's current account balance to ________.
A)rise;fall
B)remain unchanged;rise
C)rise;rise
D)remain unchanged;fall

Question

Quizplus · Accepted Answer

When a large open economy increases its investment demand, it results in an increase in the demand for loanable funds, which pushes up the world real interest rate. As a result of the higher interest rate, there is a capital inflow into the country, which causes its currency to appreciate. The appreciation of the currency leads to a fall in exports and rise in imports, which causes the current account balance to deteriorate (fall). Therefore, the correct option is A) rise;fall.

A Large Open Economy Increases Its Investment Demand