Chapter 19, Problem 1QR

To determine

The supply and demand for lonable funds in the foreign exchange market and the link between the two markets.

Explanation of Solution

The foreign exchange market is the place of market where the participants are able to buy and sell different foreign currencies with exchange to the domestic currency. Here, the lonable fund interest rate theory applies. The lonable fund includes all the forms of credit of the economy, which includes the loans, bonds, and the savings deposits.

The lonable fund supply is from the national savings of the economy. The national savings of the economy is the summation of the private savings and the government savings of the economy. This together forms the national savings, which forms the supply base of the lonable funds. The demand for the lonable funds arises from the domestic investors as well as the net capital outflow, which requires the lonable funds to meet them.

The supply of the foreign currency emerges from the net capital outflows of the economy, whereas the demand for the foreign currency exchange comes from the net exports of the economy. Thus, the link between the lonable fund market and the foreign exchange market is nothing else than the net capital outflow.

Economics Concept Introduction

Concept introduction:

Lonable funds: The term “lonable funds” includes all forms of the credit in the economy such as the savings deposits, loans, and the bonds, etc.

Foreign exchange market: The market that is meant for buying and selling of the foreign currencies and the domestic currencies in exchange.