Question

1. How does a small open economy differ from a large open​ economy?

A. A small open economy has no effect on the world real interest rate.

B. A small open economy is only open to trade with similar economies.

C.A small open economy is able to influence the world interest rate through its saving and investment decisions.

D.In a small open​ economy, equilibrium occurs when saving equals​ investment; however, in a large open economy equilibrium occurs when desired saving minus desired investment equals net exports.

2. What happens in a small open economy if there is an increase in domestic​ saving?

A. It leads to a fall in the domestic interest rate.

B. It leads to a smaller trade balance and lowers net capital outflows.

C. It leads to a larger trade balance and an increase in net capital outflows.

D. It leads to changes in the world real interest rate.

Answer 1

1. Ans is a) A small open economy has no effect on the world real interest rate.

Explanation:
An economy that is open to trade and to flows of capital across its borders and that is "small" relative to the world economy, so that whatever happens in this economy has no effect on the world real interest rate.

Option B and C are wrong

Option D is also wrong because equilibrium in a small open economy does not occur when saving equals investment, as in the closed economy. instead, it occurs when desired saving minus desired saving minus desired investment equals net exports

2. Ans is B) It leads to a smaller trade balance and lowers net capital outflows.

Explanation:
If domestic saving/investment increases than net exports increases and net capital outflows falls in the small open economy.