ECON 1BB3 Lecture Notes - Lecture 13: Loanable Funds, Exchange Rate, Capital Flight

• School: McMaster University
• Department: Economics
• Course: ECON 1BB3
• Professor: Bridget O' Shaughnessy

Document Summary

Chapter 13: a macroeconomic theory of the small open economy. Trade policy: a government policy that directly influences the quantity of goods and services that a country imports or exports. Tariff: a tax on goods produced abroad and sold domestically. Import quota: a limit on the quantity of a good that is produced abroad and sold domestically. Capital flight: a large and sudden reduction in the demand for assets located in a country. Most economists prefer to use a model that describes canada as a small open economy with perfect capital mobility. This means that borrowers must pay, and lenders demand that they receive, the world interest rate. In the analysis of the macroeconomics of such an economy, two markets are central the market for loanable funds and the market for foreign-currency exchange. In the market for loanable funds, the world interest rate determines the quantity of loanable funds made available from national saving.