If Investment=f(r*) a. Explain with pictures how it affects the balance of Supply/Saving and Investment Demand if it increases investment demand abroad
If the investment demand is increased abroad, then it would likely be a cause of the more supply savings that would make the foreign outflows and it would lead to the less currency in the host country. Due to the more investment abroad, it means there is a more favorable rate of interest and people are demanding more of the investment abroad, causing the less demand of the domestic country and more demand of the internal country.
More investment goes in the abroad, casing the domestic country economy to shrink as there is less currency circulation in the investment and the savings, causing the aggregate demand of the host country to shrink and would further weaken the multiplier effect of the domestic country.
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