Using the three-panel diagram, illustrate what happens in the US
economy if consumers save more money than they otherwise would
have. This will shift curve (b)—the supply curve in the market for
loanable funds. What happens to the interest rate? The amount of
funds loaned? Net Capital Outflow? Net Exports? The real exchange
rate?
Homework Answers
Higher domestic private saving will shift supply curve rightward to b1. As a result, interest rate will decrease from r0 to r1. At lower interest rate, Net capital outflow will increase from NCO0 to NCO1. Since net exports equal net capital outflow, higher net capital outflow will increase net exports from NX0 to NX1, causing exchange rate to decrease from e0 to e1.
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Using the three-panel diagram, illustrate what happens in the US
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