PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 11, Problem 11.4CC
To determine
Determine the impact of an increase in real interest rates abroad on net capital flow.
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Display graphically changes in the equilibrium interest rate if the economy is experiencing rapid growth in the anticipated productivity of capital investment relative to trading partner countries
A country's domestic supply of saving, domestic demand for saving for purposes of capital formation, and supply of net capital inflows
are given by the following equations:
S= 1,800 + 2,000r
/= 2,000 - 4,000r
KI= -100+ 6,000r
Instructions: Enter real interest as percent values rounded to one decimal place. If you are entering any negative numbers, be sure to
include a (-) in front of those numbers.
a. Assuming that the market for saving and investment is in equilibrium, find the current values for national saving, capital inflows,
domestic investment, and the real interest rate.
Real interest:
National Savings:
Capital inflows:
Investment:
%
b. Assuming that desired national saving declines by 120 at each value of the real interest rate. Determine the effects of this reduction
in domestic saving on the following values:
Real interest: %
National Savings:
Capital inflows:
Investment:
c. Assume instead that concerns about the economy's macroeconomic policies cause capital inflows to fall…
Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing (Balanced trade/ a trade deficit/ a trade surplus)
Now, suppose the government is experiencing a budget deficit. This means that ( National saving will increase/ national saving will decrease/ Domestic investment will increase / domestic investment will decrease) which leads to ( an increase in the supply of / a decrease in the supply of / an increase in the demand for/ a decrease in the demand for) loanable funds.
After the budget deficit occurs, suppose the new equilibrium real interest rate is 6%. The following graph shows the demand curve in the foreign-currency exchange market.
Use the green line (triangle symbol) to show the supply curve in this market before the budget deficit. Then use the purple line (diamond symbol) to show the supply curve after the budget deficit.
Summarize the…
Chapter 11 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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