Open Economy Model

Open Economy Model - r SL r r0 r0 DL NCO Loanable Funds DL...

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r r 0 r 0 r Loanable Funds DL SL NCO S$ D$ Net Capital Outflow Dollars 0 0 0 DL = I + NCO SL = S + [T-G] NCO = Capital Account Deficit, or Net Capital Outflow S$ = Net Supply of Dollars from NCO D$ = Net Demand for Dollars from Trade Surplus
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r r 0 r 0 r Loanable Funds DL SL NCI D$ S$ Net Capital Inflow Dollars 0 0 0 DL = I + (G – T) SL = S + NCI NCI = Net Capital Inflow, or Capital Account Surplus D$ = Net Demand for $ on Capital Account S$ = - NX = Imports – Exports = Trade Deficit = Net Supply of $ on Trade Balance
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r r 0 r 0 r Loanable Funds DL SL NCO S$ D$ Net Capital Outflow Dollars 0 0 0 EVENT: Decrease in the government’s budget surplus The supply of loanable funds is decreased and real interest rates rise. SL’ r 1 r 1 S$’ 0 1 As real interest rates rise, net capital outflow will fall because U.S. assets are more attractive. The net supply of dollars from our capital account deficit falls. The dollar appreciates in value, decreasing the Trade Surplus.
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r r 0 r 0 r Loanable Funds DL SL NCI D$ S$ Net Capital Inflow
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Open Economy Model - r SL r r0 r0 DL NCO Loanable Funds DL...

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