ECON 111 Chapter 13: Chapter 13
Document Summary
Chapter 13: a macroeconomic theory of the open. Supply and demand for loanable funds and for foreign-currency exchange. If the amount of national saving 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. The quantity of loanable funds demanded and the quantity of loanable funds supplied depend on the real interest rate. a. b. c. A higher real interest rate encourages people to save. A higher interest rate makes borrowing to finance capital projects more costly, discouraging investment. The supply and demand for loanable funds can be shown graphically. In a small open economy with perfect capital mobility, like canada, the domestic interest rate will equal the world interest rate. a. Panel (a) shows the world interest rate greater than the canadian interest rate causing an excess supply of loanable funds to be used to purchase foreign assets.