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Macroeconomics 19.docx

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Department
Economics
Course
ECON 201
Professor
Dr.Neri
Semester
Winter

Description
Macroeconomics Chapter 19 AMacroeconomic Theory of the Open Economy  Market for Loanable Funds  Loanable funds: the domestically generated flow of resources available for capital accumulation.  S = I + NCO  Supply comes from savings  Demand comes from domestic investment and net capital outflow  Real interest rate balances supply and demand  Ahigher real interest rate encourages people to save and raises the quantity of loanable funds supplied.  Also, makes borrowing to finance capital projects more costly, discouraging it and reducing the quantity demanded.  Ahigh U.S. real interest rate, discourages from buying foreign assets and buy U.S ones, reducing net capital outflow  At the equilibrium interest rate, the amount that people want to save exactly balances the desired quantities of domestic investment and net capital outflow.  Market for Foreign Currency Exchange  Real exchange rate balances supply and demand  Appreciation of the real exchange rate reduces the quantity of dollars demanded in the market for foreign-currency exchange  Net capital outflow does not depend on exchange rates (supply curve) because foreign assets will be cheaper but also the money will be lost when converted back into U.S. dollars.  At the equilibrium real exchange rate, the demand for dollars by foreigners arising from the U.S net exports of goods and services exactly balances the supply of dollars fromAmericans arising from U.S. net capital outflow.  Net Capital Outflow: the Link between the Two Markets  Demand in loanable funds, supply in foreign-currency excha
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