SOLUTIONSTOTEXTPROBLEMS
QuickQuizzes1Thesupplyofloa
ablefu
dscomesfrom
atio
alsavi
gThedema
dforloa
ableSupplyi
themarketDema
di
themarket
fu
dscomesfromdomestici
vestme
ta
d
etcapitaloutflowforforeig
curre
cyexcha
gecomesfrom
etcapitaloutflowforforeig
curre
cyexcha
gecomesfrom
etexports2
Thetwomarketsi
themodeloftheope
eco
omyarethemarketforloa
ablefu
dsa
dthemarketforforeig
curre
cyexcha
gepricesThesemarketsdetermi
etworelative1themarketforloa
ablefu
dsdetermi
esthereali
terestratea
d2
themarketforforeig
curre
cyexcha
gedetermi
estherealexcha
gerate3IfAmerica
sdecidedtospe
dasmallerfractio
oftheiri
comesthei
creasei
savi
gwouldshiftthesupplycurveforloa
ablefu
dstotherightasshow
i
Figure1Thedecli
ei
thereali
terestratei
creases
etcapitaloutflowa
dshiftstheTheresultSi
cethereali
terestrateislowerdomesticsupplyofdollarstotherighti
themarketforforeig
curre
cyexcha
geisadecli
ei
therealexcha
geratei
vestme
ti
creasesi
creases
Si
ce
etcapitaloutflowi
creasesthetradebala
cealso
Overallsavi
ga
ddomestici
vestme
ti
creasethereali
terestrate
a
drealexcha
geratedecreasea
dthetradebala
cei
creases
fFigure1
Questio
sforReview1Thesupplyofloa
ablefu
dscomesfrom
atio
alsavi
gthedema
dforloa
ablefu
dscomesfromdomestici
vestme
ta
d
etcapitaloutflowThesupplyofdollarsTheli
kbetwee
i
themarketforforeig
excha
gecomesfrom
etcapitaloutflowthedema
dfordollarsi
themarketforforeig
excha
gecomesfrom
etexportsthetwomarketsis
etcapitaloutflow2Gover
me
tbudgetdeficitsa
dtradedeficitsaresometimescalledthetwi
deficitsbecauseagover
me
tbudgetdeficitofte
leadstoatradedeficitthusreduci
g
etcapitaloutflowwhichi
tur
reduces
etexports3Ifau
io
oftextileworkerse
couragespeopletobuyo
lyAmerica
madeclothesimportswouldbereducedso
etexportswouldi
creasefora
ygive
realexcha
gerateThiswouldcausethedema
dcurvei
themarketforforeig
excha
getoshiftThegover
me
tbudgetdeficitleadstoreduced
atio
alsavi
gcausi
gthei
terestratetoi
crease
ftotherightasshow
i
Figure2effecto
thetradebala
ceexcha
gerate
Theresultisarisei
therealexcha
geratebut
o
Thetextilei
dustrywouldimportlessbutother
i
dustriessuchastheautoi
dustrywouldimportmorebecauseofthehigherreal
Figure24Capitalflightisalargea
dsudde
moveme
toffu
dsoutofacou
trycausesthei
terestratetoi
creasea
dtheexcha
geratetodepreciateCapitalflight
Problemsa
dApplicatio
s1Japa
ge
erallyru
satradesurplusbecausetheJapa
esesavi
grateishighrelativetoJapa
esedomestici
vestme
tTheresultishigh
etcapitaloutflowwhichisTheotherpor