Question

In a small open economy in equilibrium:__________

a. investment is fixed, and saving is determined by the saving function and the world interest rate.
b. investment is fixed, and saving is determined by the trade
c. is fixed, and investment is determined by the trade
d. is fixed, and investment is determined by the investment function and the world interest rate.

Answer 1

In a small open economy in equilibrium, investment is fixed, and saving is determined by the saving function and the world interest rate. Changes in saving can impact the trade balance, such as decreasing the trade deficit if saving increases.

Step-by-step explanation:

In a small open economy in equilibrium, investment is fixed, and saving is determined by the saving function and the world interest rate.

The level of saving is influenced by factors such as income, interest rates, and household preferences for consuming or saving.

Since investment is fixed, any changes in saving will affect the trade balance of the economy.

For example, if saving increases, there will be less need to rely on foreign capital, resulting in a decrease in the trade deficit.