The main objective of financial liberalization is ________. A) ...

[renzo156]

The main objective of financial liberalization is ________.
 
  A) to encourage financial innovation
  B) to improve the allocation of financial capital
  C) to discourage volatility in financial markets
  D) to reduce the likelihood of a credit boom

Question 2

China is a large open economy with an extraordinarily high saving rate.
 
  If, as seems likely, there is a decrease in desired saving in the coming years, what effects should we expect to see on China's trade balance (net capital flow), domestic real interest rate, and actual levels of saving and investment?

[janeli]

Answer to Question 1

B

Answer to Question 2

A decrease in desired saving leads to a decrease in the trade balance (net capital outflow), and an increase in the domestic real interest rate. The higher interest rate will prevent actual saving from falling as much as it would otherwise, but actual saving does decline. The higher interest rate causes actual investment to decline, reducing the size of the decline in the trade balance (net capital outflow).