Principles of Economics- Mankiw (5th) 665

Principles of Economics- Mankiw (5th) 665 - CHAPTER 30 A...

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CHAPTER 30 A MACROECONOMIC THEORY OF THE OPEN ECONOMY 687 exchange jointly determine the important macroeconomic variables of an open economy. Panel (a) of the figure shows the market for loanable funds (taken from Fig- ure 30-1). As before, national saving is the source of the supply of loanable funds. Domestic investment and net foreign investment are the source of the demand for loanable funds. The equilibrium real interest rate ( r 1 ) brings the quantity of loan- able funds supplied and the quantity of loanable funds demanded into balance. Panel (b) of the figure shows net foreign investment (taken from Figure 30-3). It shows how the interest rate from panel (a) determines net foreign investment. A higher interest rate at home makes domestic assets more attractive, and this in turn reduces net foreign investment. Therefore, the net-foreign-investment curve in panel (b) slopes downward. Panel (c) of the figure shows the market for foreign-currency exchange (taken
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