Factors influencing capital inflows and outflows in an open economy
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Questions and Answers

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?

    <p>Investment increases</p> Signup and view all the answers

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

    <p>High savings rate</p> Signup and view all the answers

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

    <p>Increases likelihood of capital outflows</p> 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?

    <p>It becomes equal to the capital stock determined by the world interest rate and domestic productivity.</p> Signup and view all the answers

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

    <p>It remains constant.</p> 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?

    <p>The country experiences capital inflows</p> Signup and view all the answers

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

    <p>The cost of capital equals the world interest rate plus the domestic depreciation rate.</p> 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?

    <p>The savings rate must be greater than the growth rate of population</p> 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?

    <p>They are equal</p> Signup and view all the answers

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

    <p>Higher productivity growth leads to a higher steady-state capital stock.</p> Signup and view all the answers

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

    <p>Savings rate less than alpha</p> 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?

    <p>It decreases the steady-state capital stock.</p> 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?

    <p>Net capital inflows increase if the domestic return to capital exceeds the world interest rate.</p> Signup and view all the answers

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

    <p>Capital stock per worker and technology level</p> 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?

    <p>Productivity growth</p> Signup and view all the answers

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