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In an open economy, why is the supply curve in the foreign currency exchange market vertical?
 
(i) Net capital outflow is determined by the real interest rate, not the real exchange rate.
(ii) Net capital outflow is extremely sensitive to small changes in the real exchange rate.
(iii) Net capital outflow equals net exports.
(iv) Net capital outflow is determined by real GDP, not the real exchange rate.

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Ritu Kharb
Ritu KharbLv5
8 Apr 2020

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Related questions

Assume that in a small open economy where full employment always prevails, national saving is 300.

a.

If the domestic investment is given by I = 400 - 20r, where r is the real interest rate in percent, what would the equilibrium interest rate be if the economy were closed?

b.

If the economy is open and the world interest rate is 10 percent, what will the investment be?

c.

What will the current account surplus or deficit be? What will net capital outflow be?
 

1. The government saves when it:

A) Has a balanced budget

B) Has a budget deficit.

C) Has a budget surplus.

D) Borrows by selling bonds.

2. In an open economy, total investment spending is equal to:

A) National savings plus the net capital inflow

B) Private savings plus national savings plus net capital inflow.

C) Private savings plus net capital inflow.

D) National savings minus private savings minus net capital inflow.

3. Net capital inflow is equal to:

A) GDP plus exports minus imports.

B) The growth in capital stock minus investment spending.

C) Foreign direct investment.

D) The total inflow of foreign funds minus the total outflow of domestic funds.

5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for . Therefore, national saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = . Plugging this into the original equation showing the various components of GDP results in the following relationship: S = This is equivalent to S = , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing balanced trade. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to). Outcomes of Balanced Trade Imports Exports 0 Net Exports Y C+I+G Investment Saving Net Capital Outflow 0

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