Transcript 32 - Cengage Learning EMEA

A Macroeconomic
Theory of the Open
Economy
Copyright © 2011 Cengage Learning
32
Figure 1 The Market for Loanable Funds
Real
interest
rate
Supply of loanable funds
(from national saving)
Equilibrium
real interest
rate
Demand for loanable
funds (for domestic
investment and net
capital outflow)
Equilibrium
quantity
Quantity of
loanable funds
Copyright © 2011 Cengage Learning
Figure 2 The Market for Foreign Currency
Exchange
Real
exchange
rate
Supply of pounds
(from net capital outflow)
Equilibrium
real exchange
rate
Demand for pounds
(for net exports)
Equilibrium
quantity
Quantity of pounds exchanged
into foreign currency
Copyright © 2011 Cengage Learning
Figure 3 How Net Capital Outflow Depends on the
Interest Rate
Real
interest
rate
Net capital outflow
is negative.
0
Net capital outflow
is positive.
Net capital
outflow
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Figure 4 The Real Equilibrium in an Open
Economy
(a) The market for loanable funds
Real
interest
rate
(b) Net capital outflow
Real
interest
rate
Supply
r
r
Demand
Net capital
outflow, NCO
Quantity of
loanable funds
Net capital
outflow
Real
exchange
rate
Supply
E
Demand
Quantity of
pounds
(c) The market for foreign currency exchange
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Figure 5 The Effects of a Government Budget
Deficit
1. A budget deficit reduces
(b) Net capital outflow
the supply of loanable funds . . .
(a) The market for loanable funds
Real
interest
rate
r2
S
Real
Interest
Rate
S
B
r2
A
r
2. . . . which
increases
the real
interest
rate . . .
r
3. . . . which in
turn reduces
net capital
outflow.
Demand
NCO
Quantity of
loanable funds
Net capital
outflow
Real
exchange
rate
E2
E1
5. . . . which
causes the
real exchange
rate to
appreciate.
S
S
4. The decrease
in net capital
outflow reduces
the supply of pounds
to be exchanged
into foreign
currency . . .
Demand
Quantity of
pounds
(c) The market for foreign currency exchange
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Figure 6 The Effects of an Import Quota
(a) The market for loanable funds
Real
interest
rate
(b) Net capital outflow
Real
interest
rate
Supply
r
r
3. Net exports,
however, remain
the same.
Demand
NCO
Quantity of
loanable funds
Net capital
outflow
Real
exchange
rate
E2
2. . . . and
causes the
real exchange
rate to
appreciate.
Supply
1. An import
quota increases
the demand for
pounds . . .
E
D
D
Quantity of
pounds
(c) The market for foreign-currency exchange
Copyright © 2011 Cengage Learning
Figure 7 The Effects of Capital Flight
(a) The market for loanable funds in Mexico
Real
Interest
Rate
(b) Mexican net capital outflow
Real
Interest
Rate
Supply
r2
r2
r1
r1
3. . . . which
increases
the interest
rate.
1. An increase
in net capital
outflow. . .
D2
D1
NCO1
Quantity of
2. . . . increases the demand
loanable funds
for loanable funds . . .
NCO2
Net capital
outflow
Real
exchange
rate
E
5. . . . which
causes the
peso to
depreciate.
S
S2
4. At the same
time, the increase
in net capital
outflow
increases the
supply of pesos . . .
E
Demand
Quantity of
pesos
(c) The Market for Foreign-Currency Exchange
Copyright © 2011 Cengage Learning