Consider a market for loanable funds for an open economy with floating exchange rate. Foreign investors...
Consider a market for loanable funds for an open economy with floating exchange rate. Foreign investors in a country become worried about the stability of the government due to its rising debt level. How would it affect equilibrium in the market for loanable funds and exchange rate at the foreign exchange market?
We would expect (Click to select)
1. demand for loanable funds to shift to the right and interest rate to increase
2. demand for loanable funds to shift to the left and interest rate to increase
3. supply of loanable funds to shift to the right and interest rate to increase
4. supply of loanable funds to shift to the left and interest rate to increase
5. supply of loanable funds to shift to the right and interest rate to decrease
6. supply of loanable funds to shift to the left and interest rate to decrease
7. demand for loanable funds to shift to the right and interest rate to decrease
8. demand for loanable funds to shift to the left and interest rate to decrease
and the exchange rate value of the domestic currency (Click to select)
1. will appreciate
2. will depreciate
3. will remain unchanged
4. may appreciate, depreciate, or stay unchanged in value.
Homework Answers
First question:
6. supply of loanable funds to shift to the left and interest rate to decrease
Explanation: People would like to lower the supply of loanable funds due to the concerns. So, the supply curve for loanable funds would shift left and the interest rate would fall.
Second question: will depreciate
Explanation: Investors would like to lower the demand for the currency and this will lower the exchange value of the currency.
Add Answer to:
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