In an open economy, why is the supply curve for dollars in the foreign-currency exchange market...

In an open economy, why is the supply curve for dollars in the foreign-currency exchange market vertical?

Answers:

Net capital outflow is determined by real GDP, not the real exchange rate.

Net capital outflow is extremely sensitive to small changes in the real exchange rate.

Net capital outflow is determined by the real interest rate, not the real exchange rate.

Net capital outflow equals net exports.

Expert Solution

Answer: 3^rd option

Net capital outflow (NCO) is the net amount of money invested abroad, means the supply of dollar in foreign countries. Such outflow doesn’t depend on real exchange rate but depends on real interest rate (domestically) – if the domestic real interest rate is high, saving money at home would be more profitable than in abroad.

Therefore, NCO is inversely related with domestic real interest rate – the NCO curve becomes downward slopped from left to right. But, this curve is perfectly inelastic or vertical in relation to real exchange rate, establishing a non-relation.

Rahul Sunny answered 2 years ago

In an open economy, why is the supply curve in the foreign-currency exchange market vertical? Net...

In an open economy, why is the supply curve in the foreign-currency exchange market vertical? Net capital outflow is determined by real GDP, not the real exchange rate. Net capital outflow is extremely sensitive to small changes in the real exchange rate. Net capital outflow is determined by the real interest rate, not the real exchange rate. Net capital outflow equals net exports.

Introduction to the foreign-currency exchange market In an open economy, why is the demand curve in...

Introduction to the foreign-currency exchange market In an open economy, why is the demand curve in the foreign-currency exchange market downward sloping? A) Net capital outflow equals net exports. B) A depreciation in the domestic currency causes exports to fall and imports to rise and, therefore, net exports to fall. C) When the value of the domestic currency depreciates, domestic goods become less expensive relative to foreign goods, making domestic goods more attractive to domestic and foreign consumers. D) A...

In an open economy, why is the demand curve in the foreign-currency exchange market downward sloping?...

In an open economy, why is the demand curve in the foreign-currency exchange market downward sloping? A. A depreciation in the domestic currency causes exports to fall and imports to rise and, therefore, net exports to fall. B. A depreciation of the dollar reduces the quantity of dollars demanded in the market for foreign-currency exchange. C. When the value of the domestic currency depreciates, domestic goods become less expensive relative to foreign goods, making domestic goods more attractive to domestic...

1. In an open economy, what is the source of supply in the foreign-currency exchange market?...

1. In an open economy, what is the source of supply in the foreign-currency exchange market? A. Net exports B. Exports C. Investment and Net Capital outflow D. Net Capital outflow Next question::: 2. When there is a budget deficit, will net exports increase or decrease? Next question::: 3. You have just been hired by the Canadian government to analyze the following scenario. Suppose the Canadian pharmaceutical industry is concerned with foreign prescription drug producers exporting...

If the supply of dollars in the market for foreign-currency exchange shifts left, then the exchange rate

If the supply of dollars in the market for foreign-currency exchange shifts left, then the exchange rate rises and the quantity of dollars exchanged falls. rises and the quantity of dollars exchanged does not change. rises and the quantity of dollars exchanged rises. falls and the quantity of dollars exchanged does not change. If a country has a trade deficit It has positive net exports and positive net capital outflow. It has positive net exports and negative net capital...

Where does the supply of dollars in the foreign-currency exchange market come from?

Where does the supply of dollars in the foreign-currency exchange market come from? a. from Canadian national saving b. from Canadian net capital outflow c. from domestic investment d. from foreign demand for Canadian goods

3a. The supply curve of dollars in the foreign exchange market reflects the activities of American...

3a. The supply curve of dollars in the foreign exchange market reflects the activities of American _________ and ________ investors. -importers; Mexican -importers; American -exporters; Mexican -exporters; American b. A nation whose interest rate is rising relatively fast will see its securities become ________ attractive to foreigners. Its currency will __________. -more; depreciate -more; appreciate -less; depreciate -less; appreciate c. The curve representing the demand for dollars in the foreign exchange market is downward sloping because, when the price of...

What increases the supply of Canadian dollars in the foreign exchange market? A) An increase in...

What increases the supply of Canadian dollars in the foreign exchange market? A) An increase in demand for imports from R.O.W. by Canadians. B) A decrease in demand for Canadian exports by non-Canadians. C) The Canadian dollar is expected to appreciate next year. D) U.S. interest rates fall. E) None of the above. A recessionary gap results from A) depreciation of the C$ leading to decreased imports. B) appreciation of the C$ leading to increased exports. C) appreciation of the...

Draw a Demand and Supply diagram of the foreign exchange market for dollars in equilibrium. Suppose...

Draw a Demand and Supply diagram of the foreign exchange market for dollars in equilibrium. Suppose the Federal Reserve reduces interest rates while interest rates in Europe do not change. Make use of a graph of the foreign exchange market to show how this will affect the value of the dollar.

Use the Market for Loanable Funds, Net Foreign Investment and the Market for Foreign Currency Exchange...

Use the Market for Loanable Funds, Net Foreign Investment and the Market for Foreign Currency Exchange diagrams combined, to examine the impact of a removal of import tariff on each market. In your answer make sure that you fully explain the impact in each market and that you comment on the impact on each of the following variables: 1)private saving 2)public saving 3)national saving 4)investment 5)net foreign investment 6)exchange rate 7)net exports

Question