Suppose that real interest rates decrease across Europe. This development will (Increase/Decrease) U.S. net capital outflow...

Suppose that real interest rates decrease across Europe. This development will (Increase/Decrease) U.S. net capital outflow at all U.S. real interest rates, which in turn will cause the (Demand for/Supply of) loanable funds to (Increase/Decrease) because net capital outflow is a component of the relevant curve in the loanable funds market.

Expert Solution

If real interest rates decrease across Europe, it implies that investors will not like to invest in Europe and would move their capital in some other country where relatively interest rate is higher

This development will Decrease U.S. net capital outflow at all U.S. real interest rates. This also implies that capital inflows in the US increase more than outflows. Investors will demand more US dollars

This will cause the Demand for loanable funds to decrease because net capital outflow is a component of the construction that shows loanable funds market and forex market.

Rahul Sunny answered 2 years ago

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