ECON 1BB3 Chapter Notes - Chapter 13: Loanable Funds, Real Interest Rate, Government Budget Balance

• School: McMaster University
• Department: Economics
• Course: ECON 1BB3
• Professor: Bridget O' Shaughnessy

Document Summary

Chapter 13 a macroeconomic theory of the open economy. Build model to explain an open economy"s trade balance and exchange rate: analyze effects of government budget deficits, analyze macroeconomic effects of trade policies, analyze political instability and capital flight. Net capital outflow: flow of loanable funds abroad. Market for foreign-currency exchange coordinates people who want to exchange the domestic currency for the currency of other countries. All savers go to this market to deposit savings, and all borrowers get their loans here. There is one interest rate return to saving and cost of borrowing. Saving = domestic investment + net capital outflow. In an open economy, national savings does not have to equal domestic investment. If saving is insufficient to buy domestic capital, the shortfall can be met by savings of foreigners: nco is negative. Demand for loanable funds comes from domestic investment (i)