Lec12_2handout

Lec12_2handout - A Macroeconomic Theory of the Open Economy...

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A Macroeconomic Theory of the Open Economy Slide #12-2 August 03 2010
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Supply and Demand for Loanable Funds The market for loanable funds In an open economy S = I + NCO Saving = Domestic investment + Net capital outflow Supply of loanable funds From national saving (S) Demand for loanable funds From domestic investment (I) And net capital outflow (NCO) 2 Intro Macro
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Supply and Demand for Loanable Funds The market for loanable funds Loanable funds - interpreted as Domestically generated flow of resources available for capital accumulation Purchase of a capital asset Adds to the demand for loanable funds Asset located at home: I Asset located abroad: NCO If NCO > 0, net outflow of capital - adds to demand If NCO < 0, net inflow of capital - reduce the demand 3 Intro Macro
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Supply and Demand for Loanable Funds The market for loanable funds Higher real interest rate Encourages people to save Increases quantity of loanable funds supplied Discourages investment Decreases quantity of loanable funds demanded Discourages Americans from buying foreign assets Reduces U.S. net capital outflow Encourages foreigners to buy U.S. assets Reduces U.S. net capital outflow 4 Intro Macro
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Supply and Demand for Loanable Funds The market for loanable funds Supply of loanable funds Slopes upward Demand of loanable funds Slopes downward At equilibrium interest rate Amount that people want to save Exactly balances the desired quantities of domestic investment and net capital outflow 5 Intro Macro
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Real Interest Rate The market for loanable funds 1 6 Quantity of Loanable Funds Equilibrium real interest rate Supply of loanable funds (from national saving) Demand for loanable funds (for domestic investment and net capital outflow) Equilibrium quantity The interest rate in an open economy, as in a closed economy, is determined by the supply and demand for loanable funds. National saving is the source of the supply of loanable funds. Domestic investment and net capital outflow are the sources of the demand for loanable funds. At the equilibrium interest rate, the amount that people want to save exactly balances the amount that people want to borrow for the purpose of buying domestic capital and foreign assets.
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Lec12_2handout - A Macroeconomic Theory of the Open Economy...

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