In the open-economy macroeconomic model, which of the following would make Mexico's net capital outflow decrease?

options: a decrease in Canadian interest rates an appreciation of the Mexican peso a decrease in Mexican interest rates an increase in Mexico's net exports

Expert Solution

For an economy Net exports(NX) is always equal to Net capital Outflow(NCO) i.e. NX = NCO.

So we have to find a situation which will result in decrease in net exports and hence will result in decrease in NCO.

As peso appreciated, this means more of the foreign currency is required to buy Mexican good and hence lesser Mexican good will be demanded by foreign and hence Exports will decrease. For people in Mexico, now they have to pay less Peso to buy foreign good and hence Imports will increase and hence NX = Exports - Imports will decrease. Thus option (b) is a correct answer.

Also option (d) is incorrect as in what option net exports increases but we want net exports to decrease. We can not predict with change in interest rate whether net exports will increase or decrease. Hence option (a) and (c) are also incorrect.

Hence, the correct answer is (b) an appreciation of the Mexican peso.

Rahul Sunny answered 2 years ago

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