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Problem 8: Saving and Investments (20 points) Assume that as a result of increased political instability, investors move thei
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Answer #1

(a)

If investors move their funds out of the country, saving falls. Since saving is the supply of loanable funds, this will decrease tje supply of loanable funds, shifting the supply curve for loanable funds leftward. Interest rate will increase and quantity of loanable funds (saving and investment) will decrease.

In following graphs, D0 and S0 are initial demand and supply curves of loanable funds, intersecting at point A with initial interest rate r0 and quantity of loanable funds (saving and investment) Q0. When supply falls, S0 shifts left to S1, intersecting D0 at point B with higher interest rate r1 and lower quantity of loanable funds (savings and investment) Q1.

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(b)

Lower saving and investment will reduce the rate of capital formation, which will hurt and decrease economic growth rate.

(c)

Investors pulling out funds outside the country will decrease the demand for domestic currency and increase the demand for foreign currency, which will depreciate domestic currency.

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