ECON-200 Chapter Notes - Chapter 5: Exchange Rate, Government Budget Balance, Real Interest Rate
22 Dec 2020
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Net capital outflow is the link between the 2 markets: Remember that s= i + nco and nco= nx. The net capital outflow curve (which is determined in large part by the real interest rate) is the link between the market for loanable funds and the market for foreign currency exchange. The 2 markets determine the real interest rate and the real exchange rate. Real interest rate= price of goods and services in the present relative to the prices in the future. Real exchange rate= price of domestic goods and services relative to foreign goods and services. The rates adjust to equilibrium and then determine national saving, domestic investment, net capital outflow, and net exports. How policies and events affect an open economy: determine which supply and demand curves the event affects, determine which way the curve shifts, use the diagrams to see how the shifts change the economy"s equilibrium.
