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Unformatted text preview: Figure 30-7 T HE E FFECTS OF C APITAL F LIGHT . If people decide that Mexico is a risky place to keep their savings, they will move their capital to safer havens such as the United States, resulting in an increase in Mexican net foreign investment. Consequently, the demand for loanable funds in Mexico rises from D 1 to D 2 , as shown in panel (a), and this drives up the Mexican real interest rate from r 1 to r 2 . Because net foreign investment is higher for any interest rate, that curve also shifts to the right from NFI 1 to NFI 2 in panel (b). At the same time, in the market for foreign-currency exchange, the supply of pesos rises from S 1 to S 2 , as shown in panel (c). This increase in the supply of pesos causes the peso to depreciate from E 1 to E 2 , so the peso becomes less valuable compared to other currencies....
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- Spring '10