Question

A small open economy responds to a domestic epidemic with lockdowns that sharply reduce private consumption. This causes the world real interest rate to ________ and the country's current account balance to ________.

	A.	remain unchanged; rise
	B.	rise; rise
	C.	rise; fall
	D.	remain unchanged; fall

Answer 1

Answer:

When lockdown takes place and there is a reduction in private consumption, the first impact is cut down on imports. Thus, due to low consumption and domestic lockdowns, there is a fall in imports which helps the current account balance to improve.

Hence there is a rise in current account balance.

However, the overall world real interest rates come down due to such a oandemic and to boost the economy and make funds easily available. Quantitate easing takes place and expansionary moentary policy leads to reduced interest rates overall.

However, none of the options say that world interest rates fall.

Thus, if you have written the question correctly (please cross-check), then the first option is correct, which says that world interest rate remains unchanged.

However, according to me the answer should be

fall : rise

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