Complete the first row of the table to reflect the state of the markets in Mexico. Net Capital Outflow (NCO) (Billions of pesos) Initial state After capital flight Real Interest Rate (Percent) suppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because investors now see Mexico a unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand or assets in Mexico is known as capital flight. Shift the NCO curve to illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the supply curve, the demand curve, or both curves to reflect the change caused by the shift in NCO. Note: You will not be graded on your final placement of the curves on the graph, but you will need to shift them correctly in order to answer the questions that follow. Determine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO that occurs along the new NCO curve at the new equilibrium interest rate. Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both.
Complete the first row of the table to reflect the state of the markets in Mexico. Net Capital Outflow (NCO) (Billions of pesos) Initial state After capital flight Real Interest Rate (Percent) suppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because investors now see Mexico a unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand or assets in Mexico is known as capital flight. Shift the NCO curve to illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the supply curve, the demand curve, or both curves to reflect the change caused by the shift in NCO. Note: You will not be graded on your final placement of the curves on the graph, but you will need to shift them correctly in order to answer the questions that follow. Determine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO that occurs along the new NCO curve at the new equilibrium interest rate. Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
100%
Note:-
- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism.
- Answer completely.
- You will get up vote for sure.
Transcribed Image Text:The graphs below depict the loanable funds market and the relationship between real interest rates and the level of net capital outflow (NCO)
calculated in terms of the Mexican peso.
0
The Market for Loanable Funds in Mexico
Supply
XI
Demand
8
0 1 2 3 4 5
6 7
LOANABLE FUNDS (Billions of pesos)
Initial state
After capital flight
?
Complete the first row of the table to reflect the state of the markets in Mexico.
Real Interest Rate Net Capital Outflow (NCO)
(Percent)
(Billions of pesos)
REAL EXCHANGE RATE (Dollars per peso)
REAL INTEREST RATE (Percent)
The Market for Foreign-Currency Exchange
4
Supply
IN
Demand
QUANTITY OF PESOS
Mexican Net Capital Outflow
Effects of capital flight
Summarize the results of capital flight by completing the following table.
7
6
Suppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because Investors now see Mexico as
unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand
for assets in Mexico is known as capital flight.
5
Shift the NCO curve to Illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the supply curve, the
demand curve, or both curves to reflect the change caused by the shift in NCO.
Demand
4
Note: You will not be graded on your final placement of the curves on the graph, but you will need to shift them correctly in order to answer the
questions that follow.
Supply
3
-3 -2 -1 0 1 2 3 4 5
5 6
NET CAPITAL OUTFLOW (Billions of pesos)
Determine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO that
occurs along the new NCO curve at the new equilibrium Interest rate.
2
Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both.
?
1
NCO
(?)
Real Interest Rate Real Exchange Rate Net Capital Outflow
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education