In an open economy, why is the supply curve in the foreign-currency exchange market vertical? Net...

In an open economy, why is the supply curve in the foreign-currency exchange market vertical?

Net capital outflow is determined by real GDP, not the real exchange rate.
Net capital outflow is extremely sensitive to small changes in the real exchange rate.
Net capital outflow is determined by the real interest rate, not the real exchange rate.
Net capital outflow equals net exports.

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Expert Solution

The supply curve is vertical because Net capital outflow is determined by the real interest rate not the real exchange rate. Real exchange rate is determined by the supply & demand for foreign currency exchange . The supply of dollars to be exchanged into foreign currency comes from net capital outflow because net capita outflow doesnot depend on the exchange rate.

Rahul Sunny answered 2 years ago

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