Answered: The following graphs depict the market…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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.

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

Now, suppose that Mexico experiences a sudden bout of political turmoil, which causes world financial markets to become uneasy. Because people now view Mexico as unstable, they decide to pull some 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.

Summarize the results of capital flight by completing the following table.

	Real Interest Rate	Real Exchange Rate	Net Capital Outflow
Effects of capital flight	(decrease or increase)	( decrease or increase)	(decrease or increase)

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The Market for Loanable Funds in Mexico
Mexican Net Capital Outfiow
Suppy
Nco
bemand
LOANABLE FUNDS (Billons of pesos)
NET CAPITAL OUTFLOW (Billons of pesos)
REAL INTEREST RATE Percent
REAL INTEREST RATE Percent

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