Question

1. Consider the following scenario. What will happen in the loanable funds market and the foreign exchange market?

In a small open economy, the government engages in a trade war and puts an import quota on steel.

2. Explain the effects of capital flight on the loanable funds market and foreign exchange market.

Answer 1

. In the following scenario the loanable funds market and the foreign exchange market please and considerable role in a small open economy here the government engages in a trade war and puts an import quota honesty it means that you are the restriction to import only a particular amount of steel because there is a restriction on the import quantity so there is a trade war in the domestic territory where domestic industries are trying to produce the steel.
Loanable fund theory is depend on the rate of interest in the market if the rate of interest is less then the demand of loan is high and if the rate of interest is high then the demand for loan is low.
The foreign exchange market is depend on demand and supply forces of the foreign currency in the market so if the demand of foreign exchange increases then the rate of foreign exchange market goes down in terms of domestic currency.
When there is a restriction on the import then there is a trade war in the domestic territory among the domestic industries.
The concept of capital flight means the large quantities of money are shifting from the economy and its ultimate effect is that it shifts the net capital outflow.
So when there is a trade war then the concept of capital flight is applicable on the loanable funds market and foreign exchange market where the demand of loans shift from one region to another reason and there is an unfavourable effect on the foreign exchange market.