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In a country with a small open economy, the real interest rate will always be: above...

In a country with a small open economy, the real interest rate will always be:

above the world real interest rate.

below the world real interest rate.

equal to the world real interest rate.

equal to the world nominal interest rate.

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Answer #1

Option C.

  • We know that a small open economy has its trade open to other market's globally or in other words it trades goods and services with the rest of the world.
  • The real interest rate that prevails in the entire world's financial market is known as the world real interest rate.
  • When capital is considered to be mobile and if it is open to international trade, then a small open economy will always have its real interest rate equal to the world real interest rate.
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