5. Capital flightThe 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.REAL INTEREST RATE (Percent)The Market for Loanable Funds in Mexico1467LOANABLE FUNDS (Billions of pesos)Initial stateAfter capital flight3REAL EXCHANGE RATE (Dollars per peso)SupplyDemandComplete 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)8REAL INTEREST RATE (Percent)SupplyEffects of capital flightThe Market for Foreign-Currency ExchangeQUANTITY OF PESOSSuppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because investors now see Mexico asunstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demandfor 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, thedemand 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 thequestions that follow.DemandMexican Net Capital OutflowDetermine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO thatoccurs 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.7DemandO5-3 -2 -1 0 1 2 35NET CAPITAL OUTFLOW (Billions of pesos)Summarize the results of capital flight by completing the following table.Real Interest Rate Real Exchange Rate3Supply2NCO(?)Net Capital Outflow

The term capital outflow alludes to the development of monetary capital (cash) between economies.…

5. Capital flight 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. (Percent) The Market for Loanable Funds in Mexico Supply (?) Percent) Mexican Net Capital Outflow 7 (?)