Economics: Private and Public Choice
16th Edition
ISBN: 9781337642224
Author: James D. Gwartney; Richard L. Stroup; Russell S. Sobel
Publisher: Cengage Learning US
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Chapter 9, Problem 6CQ
To determine
Explain the situation of net inflow of foreign capital
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What are foreign bonds?
Explain the function of Global Capital Market.
Over the past decade, some of Japanese saving has been used to finance US
investment. That is, the Japanese have been buying US capital assets. Use
panel of three graphs to answer the following questions :
a. If the Japanese decided they no longer wanted to buy US assets, what
would happen in the US market for loanable funds? In particular, what would
happen to US interest rates, US saving and US investment? And what happen
to NCO ?
b. What would happen in the market for foreign currency exchange? In
particular, what would happen to the value of the dollar (exchange rate) and
the US trade balance? Explain
Find a quote below and illustrate the effect of these phenomena on the world market for loanable funds. Make sure to explain the change of the equilibrium price and quantity of loanable funds.
“Many Economists worry that the aging populations of industrial countries are going to start running down their savings just when the investment appetite of emerging economies, mostly in East Asia, is growing”.
Chapter 9 Solutions
Economics: Private and Public Choice
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- onomics Indicate whether Net Capital Outflows (NCO) will increase (be positive) or decrease (be negative) in each of the following scenarios. Explain your answers. Assume you are living in the Pakistan. Chinese residents buy Pak government bonds Pak receives remittances from abroad Real interest rates changes in Pakistan from 10% to 12% Domestic Investment (I) are greater than National Savings (S) Pak exports cotton to USA worth Rs100 million Pak receives loans from the IMFarrow_forwardThe 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…arrow_forwardQuestion 23 Suppose the world consists of two countries, ABC and XYZ, only. The (autarky) equilibrium interest rate in ABC and XYZ are 15% and 12% respectively. The market for loanable funds can be described by the following equations: Demand for loanable funds DFABC = 300 – 7İABC DFXYZ = 180 – 6ixyZ Supply of loanable funds SFB = 30 + 3İABC Country АВС XYZ SFc = 60 + 14ixYZ %3D Note: Interest rates are expressed in percentage points (i.e., if i = 5, then i = 5%). (inflows or When the international flows of capital are allowed, XYZ will experience net capital (enter a number here and keep your answer to the outflows) and the size of XYZ's trade balance is nearest integer)arrow_forward
- In an open economy, the source of the demand for loanable funds is Group of answer choices investment + net capital outflow national saving + net capital outflow investment + the government budget deficit national savingarrow_forwardIf there is a weakening in time preferences among U.S. consumers and foreign entities that channel their wealth to the United States, then we can expect which of the following to increase? Select all that apply. Choose one or more: A. demand for loanable funds B. level of Investment C. supply of loanable funds D. Interest ratesarrow_forwardAssume that initially a country has a loanable funds supply curve of S₁. Now, imagine that interest rates across the country increase by 3%. Click on the curve that best represents the loanable funds supply after this increase. Interest rate 6% 5%- 4% 3% Click or tap the appropriate place in the image. S₂ 200 250 300 S₁ 350 5₂ 400arrow_forward
- Suppose that real interest rates decrease across Europe. This development will funds to U.S. net capital outflow at all U.S. real interest rates, which in turn will cause the because net capital outflow is a component of the relevant curve in the loanable funds market. loanablearrow_forwardWhat do you expect will happen to investment demand in this country?arrow_forwardA country recently had $800 billion worth of domestic investment and its residents purchased $400 billion worth of foreign assets. If foreigners purchased $100 billion of this country’s assets, what was this country’s saving? Explain how you found your answer.arrow_forward
- What is Foreign Direct Investment (FDI) all about?arrow_forward#_arrow_forwardExplain why changes in government spending are viewed as nearly always affecting national saving, while changes in taxes are viewed as having more ambiguous effects on national saving and real interest rates. Why does it matter?arrow_forward
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