In a large open economy,
A)domestic lending and borrowing decisions have no impact on the world real interest rate.
B)an increase in the domestic supply of loanable funds would lower the world real interest rate.
C)the domestic equilibrium real interest rate is determined independently of foreign borrowing and lending.
D)an increase in the domestic demand for loanable funds would lower the world real interest rate.

Question

Quizplus · Accepted Answer

In a large open economy, an increase in the domestic supply of loanable funds would lower the world real interest rate because the increased supply would lead to a decrease in the equilibrium real interest rate in the domestic market, and this would lower the world real interest rate since the country is a large player in the global market. The other options are incorrect because domestic lending and borrowing decisions do have an impact on the world real interest rate, the domestic equilibrium real interest rate can be influenced by foreign borrowing and lending, and an increase in the domestic demand for loanable funds would increase the equilibrium real interest rate and therefore raise the world real interest rate.

In a Large Open Economy