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Suppose the Market for Loanable Funds Is Described by the Equations

Question 181

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Suppose the market for loanable funds is described by the equations I = 18 - 6r and S = 8 + 4r.
a) Find the relationship between net capital outflow and the world interest rate rw.
b) If net exports are described by NX = 16 - 4X, find the relationship between NX and the world interest rate at the equilibrium exchange rate.
c) For rw = 1.4, what is the elasticity of NX with respect to rw?
d) What is the relationship between the equilibrium exchange rate and the world interest rate? Discuss your result.

Correct Answer:

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a) NCO = S - I when r = rw: NCO = 8 + 4r...

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