In the small open economy in equilibrium:
A) saving is fixed, and investment is determined by the investment function and the world interest rate.
B) investment is fixed, and saving is determined by the saving function and the world interest rate.
C) saving is fixed, and investment is determined by the trade balance.
D) investment is fixed, and saving is determined by the trade balance.

Question

Quizplus · Accepted Answer

In a small open economy, saving is not fixed, but it is determined by the income level and the world interest rate. Investment, on the other hand, is determined by the investment function and the world interest rate. The investment function depends on factors such as the profitability of investment and the cost of borrowing. Therefore, in equilibrium, saving and investment are equal, and they adjust to changes in the world interest rate.

In the Small Open Economy in Equilibrium