Suppose the market for loanable funds is described by the equations: I = 180 - 16r...

Suppose the market for loanable funds is described by the equations:
I = 180 - 16r
S = 8 + 24r

Where I is the investment, S is the national saving and r is the real interest rate. Suppose the world interest rate is 6 percent. Also, suppose that the net export curve is given by NX=74-2x where x is the real exchange rate. Calculate the following:

The equilibrium real exchange rate
Domestic investment at the world interest rate
Domestic saving at the world interest rate
Net exports
Net capital outflow

Expert Solution

Solution:

1. Equilibrium real exchange rate can be found where the net export equals 0.

NX = 74 - 2x =0

So, x = 74/2 = 37

2. Domestic investment at world interest rate:

I = 180 - 16*6 = $84

3. Domestic savings at world interest rate:

S = 8 + 24*6 = $152

5. Net capital outflow = savings - investment

NCF = 152 - 84 = $68

Rahul Sunny answered 2 years ago

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