MGEB06H3 Chapter : Week 7 chapter notes

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5. 1 the international flows of capital and goods. 5. 2 saving and investment in a small open economy. N world interest rate the interest rate prevailing in world financial markets. N foreign lenders demand a risk premium when lending funds to canadian firms and governments if they anticipate that the. N when people refer to the exchange rate between two countries, they usually mean the nominal exchange rate. When the real exchange rate is lower, domestic goods are less expensive relative to foreign goods, and net exports are greater: the trade balance (nx) must equal net foreign investment, which in turn equals saving minus investment. Saving is fixed by the consumption function and fiscal policy; investment is fixed by the investment function and the world interest rate. N at the equilibrium real exchange rate, the supply of canadian dollars available for net foreign investment balances the demand for dollars by foreigners buying canadian net exports (s i = nx)

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