Textbook Guide Economics: Exchange Rate, Loanable Funds, Real Interest Rate

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ECO102H1 Full Course Notes

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Supply and demand for loanable funds and for foreign-currency exchange. S = i + nco: s = saving, i = domestic investment, nco = net capital outflow. A high real interest rate in the u. s. discourages investment in foreign assets by americans and encourages foreigners to buy u. s. assets. As the figure above shows, the interest rate in an open economy is determined by the supply and demand for loanable funds. Nco = nx: nco = net capital outflow, nx = net exports. The figure above shows how the real exchange rate is determined by the supply and demand for foreign-currency exchange. A higher real exchange rate makes u. s. goods relatively more expensive and reduces the quantity of dollars demanded to buy those goods. Nco = nx: s = national saving, i = domestic investment, nco = net capital outflow, nx = net exports. The figure above shows how net capital outflow depends on the interest rate.

Related Questions

How do these things effect the U.S market of foreign-currency exchange and on net capital outflow (NCO): A tax reform that imposes higher capital gains tax to Americans involved in offshore banking?

Generalized increase in income tax rates not accompanied by any change in government spending.

A financial reform that sets limits to credit card fees.

A higher real interest rate in a more stable neighbor economy.

Unilateral removal of U.S import quotas.

Political instability.

A deficit-neutral tax incentive for exporting companies.

In an open economy, why is the supply curve in the foreign currency exchange market vertical?

(i) Net capital outflow is determined by the real interest rate, not the real exchange rate.

(ii) Net capital outflow is extremely sensitive to small changes in the real exchange rate.

(iii) Net capital outflow equals net exports.

(iv) Net capital outflow is determined by real GDP, not the real exchange rate.

sapphirescorpion696

5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for . Therefore, national saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = . Plugging this into the original equation showing the various components of GDP results in the following relationship: S = This is equivalent to S = , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing balanced trade. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to). Outcomes of Balanced Trade Imports Exports 0 Net Exports Y C+I+G Investment Saving Net Capital Outflow 0

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Textbook Guide Economics: Exchange Rate, Loanable Funds, Real Interest Rate

ECO102H1 Full Course Notes

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