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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. ? REAL EXCHANGE RATE (Dollars per peso) The Market for Foreign-Currency Exchange Supply QUANTITY OF PESOS Demand Demand Supply

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. ? REAL EXCHANGE RATE (Dollars per peso) The Market for Foreign-Currency Exchange Supply QUANTITY OF PESOS Demand Demand Supply

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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### Understanding the Effects of Capital Flight on Foreign Currency Markets **Instructions:** 1. **Shift the NCO Curve**: Adjust the Net Capital Outflow (NCO) curve to reflect the impact of capital flight. Subsequently, modify the graph representing the market for loanable funds by shifting the supply curve, demand curve, or both to account for the change induced by the shift in NCO. **Note:** You are not graded on the final placement of the curves, but it is essential to shift them correctly to answer the questions that follow. 2. **Determine Equilibrium Interest Rate**: Identify the new equilibrium interest rate post-capital flight and enter this rate into the second row of the table. Then, ascertain the NCO level that emerges along the new NCO curve at the newly established equilibrium interest rate. 3. **Show NCO Change Effect**: Illustrate how the change in NCO affects the market for foreign exchange by altering either the supply curve, demand curve, or both. --- **Graph Explanation:** - **Title**: The Market for Foreign-Currency Exchange - **Y-Axis**: Real Exchange Rate (in dollars per peso) - **X-Axis**: Quantity of Pesos - **Curves**: - **Supply**: Represented by a vertical orange line. - **Demand**: Represented by a downward-sloping blue line. - **Adjustments**: This interactive diagram allows the user to shift both the demand and supply lines to see the different equilibrium outcomes. --- **Table: Effects of Capital Flight** | | Real Interest Rate | Real Exchange Rate | Net Capital Outflow | |--------------------|--------------------|--------------------|---------------------| | Effects of Capital Flight | ▼ | ▼ | ▼ | **Instructions for Completing the Table**: Summarize the results of capital flight by selecting the appropriate alterations in real interest rate, real exchange rate, and net capital outflow. Ensure these changes reflect the previously analyzed shifts in the graph.
Transcribed Image Text:### Understanding the Effects of Capital Flight on Foreign Currency Markets **Instructions:** 1. **Shift the NCO Curve**: Adjust the Net Capital Outflow (NCO) curve to reflect the impact of capital flight. Subsequently, modify the graph representing the market for loanable funds by shifting the supply curve, demand curve, or both to account for the change induced by the shift in NCO. **Note:** You are not graded on the final placement of the curves, but it is essential to shift them correctly to answer the questions that follow. 2. **Determine Equilibrium Interest Rate**: Identify the new equilibrium interest rate post-capital flight and enter this rate into the second row of the table. Then, ascertain the NCO level that emerges along the new NCO curve at the newly established equilibrium interest rate. 3. **Show NCO Change Effect**: Illustrate how the change in NCO affects the market for foreign exchange by altering either the supply curve, demand curve, or both. --- **Graph Explanation:** - **Title**: The Market for Foreign-Currency Exchange - **Y-Axis**: Real Exchange Rate (in dollars per peso) - **X-Axis**: Quantity of Pesos - **Curves**: - **Supply**: Represented by a vertical orange line. - **Demand**: Represented by a downward-sloping blue line. - **Adjustments**: This interactive diagram allows the user to shift both the demand and supply lines to see the different equilibrium outcomes. --- **Table: Effects of Capital Flight** | | Real Interest Rate | Real Exchange Rate | Net Capital Outflow | |--------------------|--------------------|--------------------|---------------------| | Effects of Capital Flight | ▼ | ▼ | ▼ | **Instructions for Completing the Table**: Summarize the results of capital flight by selecting the appropriate alterations in real interest rate, real exchange rate, and net capital outflow. Ensure these changes reflect the previously analyzed shifts in the graph.
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. ### Graph Descriptions #### Left Graph: The Market for Loanable Funds in Mexico - **Axes**: - X-axis: Loanable Funds (Billions of pesos) ranging from 0 to 8. - Y-axis: Real Interest Rate (Percent) ranging from 0 to 9. - **Curves**: - **Supply Curve**: Upward sloping, indicating that as the real interest rate increases, more funds are supplied. - **Demand Curve**: Downward sloping, indicating that as the real interest rate decreases, more funds are demanded. - **Equilibrium Point**: The intersection of the supply and demand curves, where the real interest rate is about 5 percent, and the quantity of loanable funds is approximately 4 billion pesos. #### Right Graph: Mexican Net Capital Outflow - **Axes**: - X-axis: Net Capital Outflow (Billions of pesos) ranging from -4 to 6. - Y-axis: Real Interest Rate (Percent) ranging from 0 to 9. - **NCO Line**: - Downward sloping, showing that as the real interest rate increases, net capital outflow decreases. - **Intersection Point**: At real interest rate of 5 percent, with NCO at approximately 1 billion pesos. ### Table Task Complete the first row of the table to reflect the state of the markets in Mexico. | | Real Interest Rate (Percent) | Net Capital Outflow (NCO) (Billions of pesos) | |--------------------------------|------------------------------|-----------------------------------------------| | **Initial state** | | | | **After capital flight** | | | ### Explanation of Capital Flight 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**.
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. ### Graph Descriptions #### Left Graph: The Market for Loanable Funds in Mexico - **Axes**: - X-axis: Loanable Funds (Billions of pesos) ranging from 0 to 8. - Y-axis: Real Interest Rate (Percent) ranging from 0 to 9. - **Curves**: - **Supply Curve**: Upward sloping, indicating that as the real interest rate increases, more funds are supplied. - **Demand Curve**: Downward sloping, indicating that as the real interest rate decreases, more funds are demanded. - **Equilibrium Point**: The intersection of the supply and demand curves, where the real interest rate is about 5 percent, and the quantity of loanable funds is approximately 4 billion pesos. #### Right Graph: Mexican Net Capital Outflow - **Axes**: - X-axis: Net Capital Outflow (Billions of pesos) ranging from -4 to 6. - Y-axis: Real Interest Rate (Percent) ranging from 0 to 9. - **NCO Line**: - Downward sloping, showing that as the real interest rate increases, net capital outflow decreases. - **Intersection Point**: At real interest rate of 5 percent, with NCO at approximately 1 billion pesos. ### Table Task Complete the first row of the table to reflect the state of the markets in Mexico. | | Real Interest Rate (Percent) | Net Capital Outflow (NCO) (Billions of pesos) | |--------------------------------|------------------------------|-----------------------------------------------| | **Initial state** | | | | **After capital flight** | | | ### Explanation of Capital Flight 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**.
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Summarize the results of capital flight by completing the following table.
 
Real Interest Rate
Real Exchange Rate
Net Capital Outflow
Effects of capital flight               
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