Complete the first row of the table to reflect the state of the markets in Mexico. Net Capital Outflow (NCO) (Billions of pesos) Initial state After capital flight Real Interest Rate (Percent) suppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because investors now see Mexico a unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand or assets in Mexico is known as capital flight. Shift the NCO curve to illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the supply curve, the demand curve, or both curves to reflect the change caused by the shift in NCO. Note: You will not be graded on your final placement of the curves on the graph, but you will need to shift them correctly in order to answer the questions that follow. Determine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO that occurs along the new NCO curve at the new equilibrium interest rate. Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both.

Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter9: An Introduction To Basic Macroeconomic Markets
Section: Chapter Questions
Problem 6CQ
icon
Related questions
Question
100%

Note:-

  • Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism.
  • Answer completely.
  • You will get up vote for sure.
The graphs below depict the loanable funds market and the relationship between real interest rates and the level of net capital outflow (NCO)
calculated in terms of the Mexican peso.
0
The Market for Loanable Funds in Mexico
Supply
XI
Demand
8
0 1 2 3 4 5
6 7
LOANABLE FUNDS (Billions of pesos)
Initial state
After capital flight
?
Complete the first row of the table to reflect the state of the markets in Mexico.
Real Interest Rate Net Capital Outflow (NCO)
(Percent)
(Billions of pesos)
REAL EXCHANGE RATE (Dollars per peso)
REAL INTEREST RATE (Percent)
The Market for Foreign-Currency Exchange
4
Supply
IN
Demand
QUANTITY OF PESOS
Mexican Net Capital Outflow
Effects of capital flight
Summarize the results of capital flight by completing the following table.
7
6
Suppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because Investors now see Mexico as
unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand
for assets in Mexico is known as capital flight.
5
Shift the NCO curve to Illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the supply curve, the
demand curve, or both curves to reflect the change caused by the shift in NCO.
Demand
4
Note: You will not be graded on your final placement of the curves on the graph, but you will need to shift them correctly in order to answer the
questions that follow.
Supply
3
-3 -2 -1 0 1 2 3 4 5
5 6
NET CAPITAL OUTFLOW (Billions of pesos)
Determine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO that
occurs along the new NCO curve at the new equilibrium Interest rate.
2
Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both.
?
1
NCO
(?)
Real Interest Rate Real Exchange Rate Net Capital Outflow
Transcribed Image Text:The graphs below depict the loanable funds market and the relationship between real interest rates and the level of net capital outflow (NCO) calculated in terms of the Mexican peso. 0 The Market for Loanable Funds in Mexico Supply XI Demand 8 0 1 2 3 4 5 6 7 LOANABLE FUNDS (Billions of pesos) Initial state After capital flight ? Complete the first row of the table to reflect the state of the markets in Mexico. Real Interest Rate Net Capital Outflow (NCO) (Percent) (Billions of pesos) REAL EXCHANGE RATE (Dollars per peso) REAL INTEREST RATE (Percent) The Market for Foreign-Currency Exchange 4 Supply IN Demand QUANTITY OF PESOS Mexican Net Capital Outflow Effects of capital flight Summarize the results of capital flight by completing the following table. 7 6 Suppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because Investors now see Mexico as unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand for assets in Mexico is known as capital flight. 5 Shift the NCO curve to Illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the supply curve, the demand curve, or both curves to reflect the change caused by the shift in NCO. Demand 4 Note: You will not be graded on your final placement of the curves on the graph, but you will need to shift them correctly in order to answer the questions that follow. Supply 3 -3 -2 -1 0 1 2 3 4 5 5 6 NET CAPITAL OUTFLOW (Billions of pesos) Determine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO that occurs along the new NCO curve at the new equilibrium Interest rate. 2 Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both. ? 1 NCO (?) Real Interest Rate Real Exchange Rate Net Capital Outflow
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 4 images

Blurred answer
Knowledge Booster
Wealth
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Macroeconomics: Private and Public Choice (MindTa…
Macroeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506756
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Economics: Private and Public Choice (MindTap Cou…
Economics: Private and Public Choice (MindTap Cou…
Economics
ISBN:
9781305506725
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Principles of Economics 2e
Principles of Economics 2e
Economics
ISBN:
9781947172364
Author:
Steven A. Greenlaw; David Shapiro
Publisher:
OpenStax