21. Real
Interest
Rate
Quantity of Loanable Funds
Equilibrium
Rate
Equilibrium
Quantity
Market for Loanable Funds
Demand
For domestic and foreign
investment
Supply
From national savings
Too high
More supply than demand
push rate down
Too low
More demand than supply
push rate up
23. Foreign Currency
Exchange Market
If NX > 0
Selling more than buying
What to do with cash?
Must buy foreign assets
Remember foreign currency is a
foreign asset
29. Foreign Currency
Exchange Market
At the Equilibrium Exchange Rate:
Demand for currency from
foreigners from net exports =
Supply of currency from citizens
from net capital outflow
30. Real
Exchange
Rate
Quantity of Riyals Exchanged into Foreign Currency
Equilibrium
Rate
Equilibrium Quantity
Market for
Foreign Currency Exchange
Demand
For net exports
Supply
From net capital outflow
Vertical - does not depend on
exchange rate
Low rates stimulate exports
High rates discourage exports
Too low
More demand than supply
Pressure to push rate up
Too high
More supply than demand
Pressure to push rate down
33. Where did the riyals
come from?
Saudi Savers
Loanable Funds Market
Where did I buy the
riyals?
Foreign Currency Market
Currency Traders
move funds between the
two markets
36. Linking
Real
Interest
Rate
Quantity of Loanable Funds
Equilibrium
Interest
Rate
Demand
Supply
Loanable Funds Market
Real
Interest
Rate
Quantity of Loanable Funds
Demand
Net Capital Outflow
Real
Exchange
Rate
Quantity of Riyals
Equilibrium
Exchange
Rate
Demand
Supply
Foreign Currency Exchange Market
Loanable Funds Market
Interest Rate
Foreign Currency Market
Exchange Rate
37. Policy
Real
Interest
Rate
Quantity of Loanable Funds
Equilibrium
Interest
Rate
Demand
Supply
Loanable Funds Market
Real
Interest
Rate
Quantity of Loanable Funds
Demand
Net Capital Outflow
Real
Exchange
Rate
Quantity of Riyals
Equilibrium
Exchange
Rate
Demand
Supply
Foreign Currency Exchange Market
Government deficits
push up interest rates
which increase
exchange rates
which increase trade
deficits