ECON1132 Chapter Notes - Chapter 19: Exchange Rate, Loanable Funds, Real Interest Rate

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viridiancamel50

15 Dec 2017

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Supply and demand for loanable funds and for foreign currency exchange: All savers go to this market to deposit and borrowers go to this market to get their loans. When nco > 0 net money is leaving the us which increases the demand for $ in the decreasing the domestic demand for loanable funds us. When nco < 0 net money is entering the us. Higher real interest rates encourage saving which increases the q of funds. Higher rate also makes borrowing more expensive which discourages demand. At the equilibrium interest rate the same amount of people want to save as who. Market for foreign currency exchange want to invest here and abroad. Each side of the identity is a side of the market for currency exchange. Real exchange rate balances supply and demand in the market for foreign currency. Increase of real exchange rate decreases the q demanded. (real interest rate and nco are given so its vertical)

Related Questions

Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, the foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.

Domestic circumstance	Funds flow in	Funds flow out	Currency appreciates	Currency depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above the world average				X
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials

ultramarinepug302

Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.

Domestic circumstance	Funds flow in	Funds flow out	Currency appreciates	Currency depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above world average
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials
World commodity prices (such as oil or grain) fall in a country that is a major commodity exporter
GDP increases
PI falls

orchidmosquito970

Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates of return on the student's investment projects:

Student	Return
Student	(Percent)
Yakov	4
Charles	7
Dina	15

Assume borrowing and lending are prohibited, so each student uses only personal savings to finance his or her own investment project.

Complete the following table with how much each student will have a year later when the project pays its return.

Student	Money a Year Later
Student	(Dollars)
Yakov	_________
Charles	_________
Dina	_________

Now suppose their school opens up a market for loanable funds in which students can borrow and lend among themselves at an interest rate or.

If a studentâs expected rate of return is greater than r, he or she would choose to (lend, borrow).

Suppose the interest rate is 6 percent.

Among these three students, the quantity of loanable funds supplied would be $______, and quantity demanded would be $______.

Now suppose the interest rate is 12 percent.

Among these three students, the quantity of loanable funds supplied would be $______, and quantity demanded would be $______.

At an interest rate of ______%, the loanable funds market among these three students would be in equilibrium. At this interest rate, (Charles, Yakov, Yakov and Charles, Charles and Dina, Dina) would want to borrow, and (Charles, Yakov, Yakov and Charles, Charles and Dina, Dina) want to lend.

Suppose the interest rate is at the equilibrium rate.

Complete the following table with how much each student will have a year later after the investment projects pay their return and loans have been repaid.

Student	Money a Year Later
Student	(Dollars)
Yakov	_________
Charles	_________
Dina	_________

True or False: Only borrowers are made better off, and lenders are made worse off.

cyansheep662

ECON1132 Chapter Notes - Chapter 19: Exchange Rate, Loanable Funds, Real Interest Rate

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