Use the following to answer questions :
Exhibit: Saving and Investment in a Small Open Economy
-(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r₁, then the economy has:

Question

Use the following to answer questions :
Exhibit: Saving and Investment in a Small Open Economy

-(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r₁, then the economy has:

Quizplus · Accepted Answer

In a small open economy, if the world interest rate is such that it lies below the domestic equilibrium interest rate, it means that the economy is saving more than it is investing domestically. This excess saving is lent abroad, resulting in a trade surplus. This is because the country exports more than it imports, financing the difference through lending to the rest of the world.

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