Question

1. Using the Macroeconomic Model of an Open Economy, answer the following questions. What happens to each of the following if investment becomes more desirable at each interest rate?

The interest rate (rises or falls):

Net capital outflow (rises or falls):

The exchange rate (rises or falls):

2. Using the Macroeconomic Model of the Open Economy, answer the following questions. What happens to each of the following if people in the U.S. choose to save a smaller percentage of income?

The interest rate (raises or falls):

Net capital outflow (raises or falls):

The exchange rate (raises or falls):

Net exports (raises or falls):

Answer 1

Answer.) if investment becomes more desirable at each interest rate , it means profitability increases at the given interest rate levels, therefore, investors are more inclined towrads borrowing more funds for investments at current interest rate levels.

The interest rate rises:

Net capital outflow falls

The exchange rate falls

Increase in demamd of money for investmemt with no change in the supply of money force the interest rate to rise to reinstitute equilibrium in money market. Now, This increase in interest rate attract more foreign capital as its more profitable thus, this leads to rise in net capital inflow and fall in net capital outflow. As more and more foreign capital coming into your country, this increase demand of home currency in foreign exchange market and hence your currency appreciates meaning fall in exchange rate.