The following graphs depict the market for loanable funds and the relationship between the real interest rate and the level of net capital outflow (NCO) measured in terms of the Mexican currency, the peso. The Market for Loanable Funds in MexicoMexican Net Capital OutflowSupplyNCO254NC01Demand322LOANABLE FUNDS (Billions of pesos)347-3-2-112345NET CAPITAL OUTFLOW (Billions of pesos)Complete the first row of the table to reflect the state of the markets in Mexico.Real Interest RateNet Capital Outflow (NCO)(Percent)(Billions of pesos)Initial stateAfter capital flightNow, suppose that Mexico experiences a sudden bout of political turmoil, which causes world financial markets to become uneasy. Because people nowview Mexico as unstable, they decide to pull some of their assets out of Mexico and put them into more stable economies. This unexpected shock tothe demand for assets in Mexico is known as capital flight.REAL INTEREST RATE (Percent)REAL INTEREST RATE (Percent) 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 thatoccurs 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.(?)The Market for Foreign-Currency ExchangeSupplyDemandSupplyD1D2QUANTITY OF PESOSSummarize the results of capital flight by completing the following table.Real Interest RateReal Exchange RateNet Capital OutflowEffects of capital flightREAL EXCHANGE RATE (Dollars per peso)

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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) Initial state After capital flight

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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