Chp. 14 - A Macroeconomic Theory of the Open Economy

Chp. 14 - A Macroeconomic Theory of the Open Economy - Chp....

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Chp. 14 - A Macroeconomic Theory of the Open Economy Net Capital Outflow is the link between the market for loanable funds and the foreign currency exchange market. o NCO is part of the demand for loanable funds o NCO is also the source of the supply of US dollars exchanged. The market for loanable funds consists of the supply and demand for loanable funds. o S = I + NCO The market for foreign-currency exchange is the market for trading domestic currency for foreign currency. o NCO = NX A dollar of savings can be used either for domestic investment or for purchasing foreign assets. The supply of loanable funds comes from national saving, which consists of public and private saving. The demand for loanable funds is the demand for funds used for domestic investment or net capital outflow (buying foreign assets). o When net capital outflow increases, the demand for loanable funds shifts to the right. By offering savers a higher rate of return, an increase in the real interest rate encourages more saving and leads to an increase in the quantity of loanable funds supplied. As the real interest rate
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This note was uploaded on 04/07/2008 for the course ECON 252 taught by Professor Robertholand during the Fall '08 term at Purdue.

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Chp. 14 - A Macroeconomic Theory of the Open Economy - Chp....

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