Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 9, Problem 6CQ
To determine
Explain the situation of net inflow of foreign capital
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What are foreign bonds?
Explain the function of Global Capital Market.
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Indicate whether Net Capital Outflows (NCO) will increase (be positive) or decrease (be negative) in each of the following scenarios. Explain your answers. Assume you are living in the Pakistan.
Chinese residents buy Pak government bonds
Pak receives remittances from abroad
Real interest rates changes in Pakistan from 10% to 12%
Domestic Investment (I) are greater than National Savings (S)
Pak exports cotton to USA worth Rs100 million
Pak receives loans from the IMF
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.
Chapter 9 Solutions
Economics: Private and Public Choice (MindTap Course List)
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A country recently had $800 billion worth of domestic investment and its residents purchased $400 billion worth of foreign assets. If foreigners purchased $100 billion of this country’s assets, what was this country’s saving? Explain how you found your answer.
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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.
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)
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.
Summarize the results of capital flight by completing the following table.
Real Interest Rate
Real Exchange Rate
Net Capital Outflow
Effects of capital flight…
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“Is FDI a Good Sign for any country to Raise its capital” Justify the statement. Discuss the Reasons of
Decreasing of Foreign Direct Investment Globally? Being a student of Finance How Can you increase FDI
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Classify capital market in India.
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Provide two ways in which the criteria for investing differ between Foreign Direct Investment and
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Low interest rates means low inflation which means depreciated currency. This stimulates businessmen to invest abroad as interest rates are low. How can they invest abroad if the currency is depreciated? Wouldn't that be illogical and unfeasible? (According to Mankiw's textbook)Lower Interest rates encourage additional investment spending, which gives the economy a boost in times of slow economic growth. (Investopedia) Is this talking about investment spending abroad or investment spending in general? If Investment abroad increases how can that boost the economy? Aren't those statements contradictory?Recently, Turkey has experienced high inflation and high interest rates. IN spite of that its currency depreciated at historical levels. Is this because of other reasons than high inflation and high interest rates? Do we normally assume "ceteris paribus" when talking about this correlation? Even though its currency depreciated, there were investments made in Turkey. Why?
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Tariffs policy encourages the American consumers to buy American products by making imported goods more expensive, especially goods from China. The Biden administration has not indicated that it plans to lower the hefty tariffs that Mr. Trump placed on Chinese goods. Using appropriate diagrams for the loanable funds market, the net foreign investment, and the market for foreign currency exchange in the United States (US), critically analyse:
(a) How does this trade policy affect national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance in the US?
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If the quantity of loanable funds supplied is greater than the quantity demanded, what are the excess funds used for?
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b. Canadians to purchase domestic investments
c. foreigners to purchase Canadian assets
d. foreigners to purchase Canadian goods
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In general, foreign entities:
a.
are borrowers of domestic (U.S.) loanable funds.
b.
require a greater inflation premium than domestic borrowers.
c.
are not concerned about the U.S. interest rate compared to their own, since it is illegal for them to lend in the United States.
d.
are lenders in the domestic (U.S.) loanable funds.
e.
require a smaller inflation premium than domes
tic borrowers.
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If foreign income and wealth decrease, this would most likely
a. not affect the market for loanable funds.
b. cause the supply of loanable funds to increase.
c. cause the supply of loanable funds to decrease.
d. cause the demand for loanable funds to increase in order for foreigners to maintain consumption.
e. cause the demand for loanable funds to decrease.
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What is the difference between foreign direct investment and foreign portfolio investment.
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