Principles of Economics- Mankiw (5th) 660

Principles of Economics- Mankiw (5th) 660 - 682 PA R T E L...

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682 PART ELEVEN THE MACROECONOMICS OF OPEN ECONOMIES the amount that people want to save exactly balances the desired quantities of domestic in- vestment and net foreign investment. THE MARKET FOR FOREIGN-CURRENCY EXCHANGE The second market in our model of the open economy is the market for foreign- currency exchange. Participants in this market trade U.S. dollars in exchange for foreign currencies. To understand the market for foreign-currency exchange, we begin with another identity from the last chapter: NFI ± NX Net foreign investment ± Net exports. This identity states that the imbalance between the purchase and sale of capital as- sets abroad ( NFI ) equals the imbalance between exports and imports of goods and services ( NX ). When U.S. net exports are positive, for instance, foreigners are buy- ing more U.S. goods and services than Americans are buying foreign goods and services. What are Americans doing with the foreign currency they are getting from this net sale of goods and services abroad? They must be adding to their
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