Question 9 Initially, there is a positive net capital outflow in a
small open economy with a perfect capital mobility. Suppose the
government expenditure G decreases. Which of the following
statement is correct in the loanable funds market?
A. Demand curve shifts to the right.
B. Demand curve shifts to the left.
C. Supply curve shifts to the right.
D. Supply curve shifts to the left.
E. None of the above is correct
If the government expenditure in the economy decreases that will lead to a fall in the interest rate and increase the outflow of capital depreciating the local currency. That will decrease the imports and shift the demand curve to the right. The answer is "A".
Question 9 Initially, there is a positive net capital outflow in a small open economy with...