Chapter 41, Problem 2FRQ

To determine

Graphical representation of graphs of country U and country C to show higher interest rates leading to capital inflow.

Explanation of Solution

Equilibrium is a condition in which market demand and supply or market forces are balanced, resulting in steady prices. Demand and supply balance each other out, resulting in a condition of equilibrium.

In the graph shown below, E represents the equilibrium:

  

Graph 1

At an interest rate greater than 4%, there will be capital inflow as shown in graph a) whereas in graph b) capital outflow is shown below the interest rate of 4%.

Economics Concept Introduction

Balance of Payment: Balance of payment is the recording of transactions that occur with one country and the rest of the world over a financial period. It records the trading of goods and services and transfers payments.