Unformatted text preview: Because of the Identlty equation that relates net capital outﬂow to net exports, the decrease of In u.s. net
exports Is matched by a decrease of In the u.s. net capital outﬂow. Which of the followlng are examples of how
net capital outﬂow from the United States might be affected under thIs scenarlo? Check all that apply. of E Sony purchases s2.oao worth of stock In a U.5. company.
of E Sony purchases s2,oao worth of U.S. bonds.
1" E Sony exchanges the $2,Dub for yen at the local bank, which then uses the dollars to purchase U.5. bonds. Explanation: ﬂan A Because of how net capital outflow and net exports are deﬁned and measured, a change In one tenn must result In a
change In the other In order for the Identity to remain true. In this case, the decrease In U.5. net exports Is matched
by a decrease In the U.5. net capItaI outflow. Net capital outflow Is defined as the purchase of foreign assets by
domestic residents minus the purchase of domestic assets by foreigners. So In order for net capital outﬂow to
decrease, either the purchase of foreign assets by domestic. residents must decrease, or the purchase of domestic
assets by foreigners must increase. Sony's Inyestment In US. assets, such as bonds and stocks Is equlyalent to an Increase In the purchase of domesdc
assets by foreigners. Alte‘natiyely, If Sony exchanges the s2,oao payment at the bank, the purchase of U.S. assets
by the foreign bank also leads to a decrease In net capital outﬂow. ...
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- Spring '08