In a large open economy, the interest rate adjusts so that domestic saving equals:

In a large open economy, the relationship between domestic saving, investment, and capital flows is critical for understanding how the economy balances. The correct choice states that domestic saving equals domestic investment plus net capital outflow.

This relationship arises from the fundamental identity in the balance of payments. In an open economy, total saving (S) can be allocated either to domestic investment (I) or to net capital outflow (NCO), which accounts for the investment in foreign assets minus foreign investment in domestic assets. The equation can be summarized as:

[ S = I + NCO ]

Here, domestic investment reflects the amount of capital generated and used within the country, while net capital outflow represents the funds that are invested abroad. Therefore, domestic saving is not just tied to domestic investment but also includes the funds that are leaving the economy. This ensures that overall savings in the economy are accounted for, whether they remain within the country or are invested abroad.

The other choices do not accurately capture the full scope of the relationship between saving and capital flows in an open economy. For instance, stating domestic saving equals only domestic investment ignores the importance of net capital outflow and how it affects the overall economy's savings and investment balance. Similarly, equating domestic