N2

Consider a small open economy that takes the world real interest rate as given. Suppose that initially the world real interest rate is less than the country's autarky real interest rate. Now suppose there is a change in tax policy that leads to an increase in domestic investment demand. Which of the following is TRUE?

The economy may flip from importing capital to exporting capitalNone of the other optionsThere is an increase in the quantity of domestic savingThere is an increase in the real interest rate paid by domestic investors