The two graphs show hypothetical markets for loanable funds and foreign-currency exchange in a small open economy with perfect capital mobility. Shift one or more curves in the foreign-currency exchange market to show the real exchange rate based on the loanable funds market when the world interest rate increases to 6%. Real interest rate 10 9 8 7 6 5 4 3 2 1 0 $20 40 Market for loanable funds Supply of loanable funds from national savings (S) Demand for loanable funds for domestic investment (I) 60 80 100 120 140 160 180 200 Quantity of loanable funds (billions) Real exchange rate (%) 10 9 8 7 6 5 ▷ 3 2 1 0 0 Market for foreign-currency exchange 10 20 Supply of dollars 30 40 50 60 Quantity of dollars (billions) 70 Demand for dollars 80 90 100

The two graphs show hypothetical markets for loanable funds and foreign-currency exchange in a small open economy with perfect capital mobility. Shift one or more curves in the foreign-currency exchange market to show the real exchange rate based on the loanable funds market when the world interest rate increases to 6%. Real interest rate 10 9 8 7 6 5 4 3 2 1 0 $20 40 Market for loanable funds Supply of loanable funds from national savings (S) Demand for loanable funds for domestic investment (I) 60 80 100 120 140 160 180 200 Quantity of loanable funds (billions) Real exchange rate (%) 10 9 8 7 6 5 ▷ 3 2 1 0 0 Market for foreign-currency exchange 10 20 Supply of dollars 30 40 50 60 Quantity of dollars (billions) 70 Demand for dollars 80 90 100

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Open-economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 2PA

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