ECON282 Lecture Notes - Lecture 5: Real Interest Rate, Loanable Funds, Exchange Rate
24 Jul 2016
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If an investors exchange rate appreciates, then their return will be lower. Expecting returns on investments to equalize in the long run: i (domestic) = i (foreign) [(e(future) e )/ e] Example: a us bond pays 4% over a year while a canadian bond pays 3%. You expect the cad to go up from 1cad = 0. 80 usd to 1 cad = 0. 88 usd. Return us bond = i (us) [e(future) e / e] You should pick the canadian bond since 3% > -6% Doesn"t hold up in real world: transaction costs, different liquidity, exchange rate risk prevents people from buying. Suppliers are savers they provide the loans. Savers or lenders are on the supply side. Here the real gdp is the total income is used. Nx because canada is borrowing from foreign investors or foreign investment is greater. Changes in anything other than the interest rate is going to shift the supply curve.
