a. Suppose an economy in Asia is facing with a massive capital outflow because of the...
a. Suppose an economy in Asia is facing with a massive capital outflow because of the sovereign debt crisis in Europe. Explain (with the aid of diagrams) its effects on domestic interest rate, real exchange rate, national saving, domestic investment, net capital outflow and net exports.
Homework Answers
Whrn an economy faces massive capital outflow it pressurizes the currency and causes its depreciation which further results in decrease in domestic interest rates. Since interest rates decrease domestic savings are lower and domestic investment is higher because of cheap credit availability in economy .
Since the currency depreciates it forces the sellers and suppliers to export more and averse the situation from further depreciation of real exchange rate. As results net capital inflow increases and hence net capital outflow decreases. Thus balance of payments remains constant.
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