35. How Net Capital Outflow Depends on the Interest Rate 0 Net Capital Outflow Real Interest Rate Net capital outflow is negative. Net capital outflow is positive.
36.
37. The Real Equilibrium in an Open Economy (a) The Market for Loanable Funds (b) Net Capital Outflow Real Interest Rate Real Interest Rate (c) The Market for Foreign-Currency Exchange Quantity of Dollars Quantity of Loanable Funds Net Capital Outflow Real Exchange Rate Net capital outflow, NCO Supply Supply Demand Demand r r E
38.
39.
40. The Effects of Government Budget Deficit (a) The Market for Loanable Funds (b) Net Capital Outflow Real Interest Rate Real Interest Rate Quantity of Dollars Quantity of Loanable Funds Net Capital Outflow Real Exchange Rate Demand Demand NCO S S r 2 S S r 2 B E 1 r r A 1. A budget deficit reduces the supply of loanable funds . . . 2. . . . which increases the real interest rate . . . 4. The decrease in net capital outflow reduces the supply of dollars to be exchanged into foreign currency . . . 5. . . . which causes the real exchange rate to appreciate. 3. . . . which in turn reduces net capital outflow. E 2
41.
42. The Effects of an Import Quota (a) The Market for Loanable Funds (b) Net Capital Outflow Real Interest Rate Real Interest Rate (c) The Market for Foreign-Currency Exchange Quantity of Dollars Quantity of Loanable Funds Net Capital Outflow Real Exchange Rate Supply Supply Demand NCO D E r r D 3. Net exports, however, remain the same. 2. . . . and causes the real exchange rate to appreciate. E 2 1. An import quota increases the demand for dollars . . .
43.
44. The Effects of Capital Flight (a) The Market for Loanable Funds in Mexico (b) Mexican Net Capital Outflow Real Interest Rate Real Interest Rate (c) The Market for Foreign-Currency Exchange Quantity of Pesos Quantity of Loanable Funds Net Capital Outflow Real Exchange Rate r 1 r 1 D 1 Demand S Supply NCO 1 D 2 E S 2 NCO 2 1. An increase in net capital outflow. . . 3. . . . which increases the interest rate. 2. . . . increases the demand for loanable funds . . . 4. At the same time, the increase in net capital outflow increases the supply of pesos . . . 5. . . . which causes the peso to depreciate. r 2 r 2 E