study guide - Macroeconomics Final Chapter 14 1 Loanable...

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Macroeconomics Final Chapter 14: 1. Loanable funds market: Saving and Investment in Open Economy: a. S = I + NCO b. A high U.S. real interest rate reduces U.S. net capital outflow c. At the equilibrium interest rate, the amount that people want to save exactly balances the desired quantities of domestic investment and net capital outflow 2. Net capital outflow does not depend on the exchange rate 3. Same 4. At the equilibrium real exchange rate, the demand for dollars by foreigners arising from the U.S. net exports of goods and services exactly balances the supply of dollars from Americans arising from U.S. net capital outflow 5. Effects of different changes on real exchange: a. Chang e in world interest b. Change in govt. expenditure i. Govt. budget deficit reduces the supply of loanable funds, drives up the interest rate, and crowds out investment ii. A budget deficit causes the real exchange rate to appreciate iii. In an open economy, government budget deficits raise real interest rates, crowd out domestic investment, cause the currency to appreciate, and push the trade balance toward deficit
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c. Change in trade policy i. An import quota increases the demand for dollars and causes the real exchange rate to appreciate ii. Net exports, however, remain the same iii. Import quota reduces both imports and exports, but net exports are unchanged iv. Trade policies do not affect the trade balance d. Capital Flight caused by domestic or foreign economic instability i. An increase in net capital outflow increases the demand for loanable funds which increases the interest rate which causes the real exchange rate to depreciate ii. At the same time, the increase in net capital outflow increases the supply of
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study guide - Macroeconomics Final Chapter 14 1 Loanable...

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