Question

In: Economics

For an open economy with perfect capital mobility, when net capital outflow is measured along the...

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

horizontal line at the world real interest rate.

line that slopes down and to the right.

vertical line at 0.

line that slopes up and to the right.

Please explain, thank you,

Solutions

Expert Solution

Net capital outflow is equal to the amount that domestic investors lend abroad minus the amount that foreign investors lend here.

For an open economy with perfect capital mobility , the net capital outflow is drawn as a horizontal line at the world real interest rate. Because for open economy , there is imports and exports exists , and it depends on the domestic interest rate , at world interest rate it is a horizontal line.

If it is a closed economy , then net capital outflow is drawn as a vertical line at 0 , because in closed economy there is exports.

Hence, option(A) is correct.

Rahul Sunny answered 2 years ago
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