Question

When future labour income falls in a large open economy, it causes the current account to ________ and investment to ________.

Please solve this question by using the concept/idea of national and savings in open economy with world interest rate.

A) fall; rise

B) rise; remain unchanged

C) fall; remain unchanged

D) rise; rise

Answer 1

Option D.

• When future labour income falls in a large open economy, it causes the current account to rise and investment to fall.
• A large open economy is where the exchange of goods and services occur very lavishly and it is large enough to affect the world's real interest rates.
• In the larger economies, the current account balance rises when the country's borrowing exceeds desired lending.
• With surplus in the current account, the world interest rates rises and the investment increases with increased account balance.