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Lecture 19

LGS 200 Lecture 19: Macroeconomics Chapter 19 Notes

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University of Alabama
Legal Studies
LGS 200

Macroeconomics Chapter 19 Notes The Market For Loanable Funds • An identity from the preceding chapter: S = I + NCO (saving) = (domestic income) + (net capital outflow) • Supply of loanable funds = saving • A dollar of saving can be used to finance ➢ The purchase of domestic capital ➢ The purchase of a foreign asset • So, demand for loanable funds = I + NCO • Recall: ➢ S depends positively on the real interest rate, r. ➢ I depends negatively on r. • What about NCO? How NCO Depends on the Real Interest Rate • The real interest rate, r, is the real return on domestic assets. • A fall in r makes domestic assets less attractive relative to foreign assets. ➢ People in the US purchase more foreign assets ➢ People abroad purchase fewer US assets ➢ NCO rises The Loanable Funds Market Diagram • r adjusts to balance supply and demand in the loanable funds market • Both I and NCO depend negatively on r, so the demand curve is downward- sloping. The Market for Foreign-Currency Exchange • Another identity from the previous chapter: NCO = NX (net capital outflow) = (net exports) • In the market for foreign-currency exchange: ➢ NX is the demand for dollars: Foreigners need dollars to buy US net exports. ➢ NCO is the supply of dollars: US residents sell d
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