Factors influencing capital inflows and outflows in an open economy

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What determines whether a country will experience capital inflows or outflows when it opens its financial account to foreign investors?

Difference between savings and investment for the current world interest rate (correct)

Difference between consumer spending and disposable income

Difference between government spending and taxation

Difference between exports and imports of goods

When will a country most likely experience capital inflows according to the text?

When labor efficiency is low

When labor efficiency is high (correct)

When the savings rate is high

When the world interest rate is high

Why do emerging countries with higher productivity growth tend to experience net capital outflows according to the text?

Because of higher national savings (correct)

Due to lower productivity growth reducing investment

Higher productivity leading to lower national savings

Lack of access to foreign capital markets

In the context of net capital flows, what happens if the world interest rate is lower than the interest rate in autarchy?

Investment increases (A) Signup and view all the answers

Which factor is more likely to lead a country to experience capital inflows according to the text?

High savings rate (A) Signup and view all the answers

What is the impact of a low savings rate on a country's likelihood to experience capital inflows?

Increases likelihood of capital outflows (B) Signup and view all the answers

What happens to the steady-state capital stock per worker when a small open economy has unlimited access to borrowing or lending in world capital markets?

It becomes equal to the capital stock determined by the world interest rate and domestic productivity. (C) Signup and view all the answers

In the long-run steady state of the closed economy, what happens to GDP per capita?

It remains constant. (C) Signup and view all the answers

What does it mean when a country is a net borrower vis-à-vis the rest of the world?

The country experiences capital inflows (C) Signup and view all the answers

How does financial openness affect the cost of capital in the small open economy?

The cost of capital equals the world interest rate plus the domestic depreciation rate. (B) Signup and view all the answers

In the context of net capital flows, what condition must be met for a country to be a net borrower?

The savings rate must be greater than the growth rate of population (B) Signup and view all the answers

What is the relationship between the world interest rate and the growth rate of population in an open economy?

They are equal (D) Signup and view all the answers

What role does productivity growth play in determining the steady-state capital stock in the open economy?

Higher productivity growth leads to a higher steady-state capital stock. (B) Signup and view all the answers

What inequality must hold for a country to experience capital inflows?

Savings rate less than alpha (B) Signup and view all the answers

How does an increase in the world interest rate affect the steady-state capital stock in the small open economy?

It decreases the steady-state capital stock. (D) Signup and view all the answers

What happens to net capital flows in the small open economy when it moves from a closed to an open capital account regime?

Net capital inflows increase if the domestic return to capital exceeds the world interest rate. (C) Signup and view all the answers

What determines the GDP per capita in a closed economy according to the provided text?

Capital stock per worker and technology level (A) Signup and view all the answers

What factor affects the ratio of GDP per capita in an open economy to that in a closed economy?

Productivity growth (D) Signup and view all the answers