Essay
The market for loanable funds in country 1 is described by the equations I = 18 - 6r and S = 8+4r; in country 2, it is I = 18 - 4r and S = 8 + 2r.
a) Find the relationships between net capital outflow and the world interest rate (rw) in the two countries.
b) What is the nature of these relationships? (Are they both positive, both negative, or one positive and the other negative?)
c) Calculate the world equilibrium interest rate.
d) How can you reconcile the result from part b with the one from part c?
Correct Answer:
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a) In country 1, NCO1 = S - I when r = r...View Answer
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