Textbook Notes (280,000)
CA (170,000)
McMaster (10,000)
ECON (800)
ECON 1B03 (300)
Chapter 13

ECON 1B03 Chapter Notes - Chapter 13: Mexican Peso, Capital Flight, Loanable Funds


Department
Economics
Course Code
ECON 1B03
Professor
Bridget O' Shaughnessy
Chapter
13

This preview shows half of the first page. to view the full 3 pages of the document.
Chapter 13.
Supply and Demand for Loanable Funds and for Foreign Currency Exchange
Market for Loanable Funds
- S=I+NCO
- Savings=Domestic Investment + Capital Outflow
- If the amount of national savings exceeds the amount needed to finance the purchase of
domestic capital, the amount left over can be used to finance the purchase of an asset abroad…
then NCO is positive
- If national savings is insufficient to finance the purchase of domestic capital, the shortfall can be
met by the savings of foreigners… then NCO is negative
- A higher real interest rate encourages people to save and therefore raises the quantity of
loanable funds made available by national savings
But… makes borrowing to finance capital projects more costly, which in turn discourages
investment and reduces the quantity of loanable funds demanded
- Demand curve slopes downward because a higher interest rate decreases the quantity of
loanable funds demanded
- Supply curve slopes upward because a higher interest rate increases the quantity of loanable
funds supplied
- A negative value simply indicates a net purchase of Canadian’s assets by foreigners
- Net Capital Outflow is determined by the difference between the supply of loanable funds due
to national savings (s) and the demand for loanable funds (I) at the world interest rate
- NCO=NX
- Net capital outflow=net exports
The Market for Foreign-Currency Exchange
- Market for foreign- currency exchange is a market to exchange money from around the world
- NCO=NX
- So… S=I+NCO
- And… S-I=NCO
- Demand slopes downward because a higher real exchange rate maker Canadian goods more
expensive and reduces the quantity of dollars demanded to buy those goods
- Supply curve is vertical because the quantity of dollars supplied for net capital outflow does not
depend on the real exchange rate
- If real exchange rate was below the equilibrium level, the quantity of dollars supplied would be
less than the quantity demanded… this would push the dollar value up
- If the real exchange rate was above the equilibrium level, the quantity of dollars supplied would
exceed the quantity demanded… this would push the dollar value down
You're Reading a Preview

Unlock to view full version