Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 9, Problem 6CQ
To determine
Explain the situation of net inflow of foreign capital
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What are foreign bonds?
Explain the function of Global Capital Market.
Over the past decade, some of Japanese saving has been used to finance US
investment. That is, the Japanese have been buying US capital assets. Use
panel of three graphs to answer the following questions :
a. If the Japanese decided they no longer wanted to buy US assets, what
would happen in the US market for loanable funds? In particular, what would
happen to US interest rates, US saving and US investment? And what happen
to NCO ?
b. What would happen in the market for foreign currency exchange? In
particular, what would happen to the value of the dollar (exchange rate) and
the US trade balance? Explain
Find a quote below and illustrate the effect of these phenomena on the world market for loanable funds. Make sure to explain the change of the equilibrium price and quantity of loanable funds.
“Many Economists worry that the aging populations of industrial countries are going to start running down their savings just when the investment appetite of emerging economies, mostly in East Asia, is growing”.
Chapter 9 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- In an open economy, why is the supply of loanable funds upward sloping? a) A higher real interest rate discourages domestic consumers from buying foreign assets. b) A lower interest rate makes borrowing more expensive. c) A lower real interest rate encourages people to save. d) A higher real interest rate encourages people to save.arrow_forwardThe following graphs depict the market for loanable funds and the relationship between the real interest rate and the level of net capital outflow (NCO) measured in terms of the Mexican currency, the peso. Complete the first row of the table to reflect the state of the markets in Mexico. Real Interest Rate Net Capital Outflow (NCO) (Percent) (Billions of pesos) Initial state After capital flight Now, suppose that Mexico experiences a sudden bout of political turmoil, which causes world financial markets to become uneasy. Because people now view Mexico as unstable, they decide to pull some of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand for assets in Mexico is known as capital flight. Summarize the results of capital flight by completing the following table. Real Interest Rate Real Exchange Rate Net Capital Outflow Effects of capital flight…arrow_forwardQuestion 23 Suppose the world consists of two countries, ABC and XYZ, only. The (autarky) equilibrium interest rate in ABC and XYZ are 15% and 12% respectively. The market for loanable funds can be described by the following equations: Demand for loanable funds DFABC = 300 – 7İABC DFXYZ = 180 – 6ixyZ Supply of loanable funds SFB = 30 + 3İABC Country АВС XYZ SFc = 60 + 14ixYZ %3D Note: Interest rates are expressed in percentage points (i.e., if i = 5, then i = 5%). (inflows or When the international flows of capital are allowed, XYZ will experience net capital (enter a number here and keep your answer to the outflows) and the size of XYZ's trade balance is nearest integer)arrow_forward
- Classify capital market in India.arrow_forward“The result of the war that happened in Country A, it made Country A has negative public saving which is reduces national saving (the sum of public and private saving)”. Based on this information, explain (Show it with the graph) what happen in the market for loanable funds and the market for foreign currency exchangearrow_forwardAssume that initially a country has a loanable funds supply curve of S₁. Now, imagine that interest rates across the country increase by 3%. Click on the curve that best represents the loanable funds supply after this increase. Interest rate 6% 5%- 4% 3% Click or tap the appropriate place in the image. S₂ 200 250 300 S₁ 350 5₂ 400arrow_forward
- Question 23 Suppose the world consists of two countries, ABC and XYZ, only. The (autarky) equilibrium interest rate in ABC and XYZ are 15% and 12% respectively. The market for loanable funds can be described by the following equations: Country Demand for loanable funds Supply of loanable funds АВС DFABC = 300 – 7IABC SFB = 30 + 31ABC XYZ DFXYZ = 180 - 6ixyz SFc = 60 + 14ixYz Note: Interest rates are expressed in percentage points (i.e., if i = 5, then i = 5%). (inflows or When the international flows of capital are allowed, XYZ will experience net capital (enter a number here and keep your answer to the outflows) and the size of XYZ's trade balance is nearest integer) Nextarrow_forwardThe following figure shows the demand and supply curve for capital market. Find the price of capital, output of capital, depreciation value, net investment value and capital growth at the level of capital market equilibrium. Price of Capital SK SK + SK P1 P2 DK + dk P3 DK Pm Quantity of Сapital KI K2 K3 K4arrow_forwardTrue or false? Low saving impedes growth in capital, productivity, and living standards for a closed economy, but not for an open economy. You'd better explain your answer by graph. (Hint: Consider elasticity of demand/supply in loanable fund market.)arrow_forward
- The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds.arrow_forwardThe following graphs depict the market for loanable funds and the relationship between the real interest rate and the level of net capital outflow (NCO) measured in terms of the Mexican currency, the peso.arrow_forward
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