Complete the first row of the table to reflect the state of the markets in Mexico. Real Interest Rate (Percent) Net Capital Outflow (NCO) (Billions of pesos) Initial state After capital flight Now, suppose that Mexico experiences a sudden bout of political turmoil, which causes world financial markets to become uneasy. Because people now view Mexico as unstable, they decide to pull some 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. Shift the NCO curve to illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the demand curve, the supply curve, or both 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. (?)
Complete the first row of the table to reflect the state of the markets in Mexico. Real Interest Rate (Percent) Net Capital Outflow (NCO) (Billions of pesos) Initial state After capital flight Now, suppose that Mexico experiences a sudden bout of political turmoil, which causes world financial markets to become uneasy. Because people now view Mexico as unstable, they decide to pull some 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. Shift the NCO curve to illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the demand curve, the supply curve, or both 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. (?)
Chapter21: Financial Markets, Saving, And Investment
Section: Chapter Questions
Problem 6P
Related questions
Question
Capital flight
Transcribed Image Text:Complete the first row of the table to reflect the state of the markets in Mexico.
Real Interest Rate
(Percent)
Net Capital Outflow (NCO)
(Billions of pesos)
Initial state
After capital flight
Now, suppose that Mexico experiences a sudden bout of political turmoil, which causes world financial markets to become uneasy. Because people now
view Mexico as unstable, they decide to pull some 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.
Shift the NCO curve to illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the demand curve, the
supply curve, or both 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.
(?)
80
F3
Q
F4
9
F5
MacBook Air
F6
F7
DII
F8
F9
F10
F11
F12
A-Z
bongo
A
Transcribed Image Text:The following graphs depict the market for loanable funds and the relationship between the real interest rate and the level of net capital outflow (NCO)
measured in terms of the Mexican currency, the peso.
80
F3
REAL INTEREST RATE (Percent)
9
8
1
The Market for Loanable Funds in Mexico
0
2
3
7
5 6
LOANABLE FUNDS (Billions of pesos)
1
Q
F4
4
9
Supply
F5
Demand
8
(?)
MacBook Air
C
F6
REAL INTEREST RATE (Percent)
F7
-4
Mexican Net Capital Outflow
5
3
2
NCO
-1
0
1 2 3
4 5 6
-3
NET CAPITAL OUTFLOW (Billions of pesos)
DII
F8
F9
?
F10
F11
+
F12
A+
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