A Small Country Is a Net Foreign Borrower and Its

question 122

Multiple Choice

A small country is a net foreign borrower and its supply of loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________.

• A)increases; does not change
• B)does not change; decreases
• C)does not change; increases
• D)does not change; does not change

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Definitions:

Substitution Effect

The adjustment in how consumers spend due to differences in the prices between goods, leading to the substitution of one product for another.

Inferior Good

A type of good whose demand decreases when consumer income rises, unlike normal goods, which have a positive correlation with income.

Normal Good

A type of good for which demand increases as the income of the consumer increases, showing a positive relationship between income and demand.

Demand Function

A mathematical formula that describes the relationship between the quantity of a good or service demanded and its price, along with other factors like income and the prices of related goods.