Assume that Lalaland is a small open economy. Explain how an increase in the consumer confidence...
Assume that Lalaland is a small open economy. Explain how an increase in the consumer confidence in the rest of the world (i.e., an increase in autonomous consumption) affects the world interest rate and the Lalaland interest rate, level of investment, net exports and net capital outflows. Support your answer with a graph of the rest of the world loanable funds market and a graph of the loanable funds market of Lalaland.
Homework Answers
(a) Loanable funds market for rest of the world (ROW)
Increase in consumer confidence in ROW raises consumption and lowers savings in ROW, decreasing supply of loanable funds. Supply curve shifts left, increasing world interest rate and decreasing the quantity of loanable funds in ROW.
In following graph, ROW supply curve S0 shifts left to S1, intersecting initial ROW demand curve D0 at point B with higher interest rate r1 (higher than r0) and lower quantity of loanable funds Q1 (lower than Q0).
(b) Loanable funds market for Lalaland (small open country)
Increase in world interest rate increases domestic interest rate in Lalaland, from r0 to r1. Hence, quantity of loanable funds demanded falls to Q1 and quantity of loanable funds supplied rises to Q2. Hence net capital outflow falls from NCO0 to NCO1, so net exports fall from NX0 to NX1, increasing the exchange rate from e0 to e1.
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Assume that Lalaland is a small open economy. Explain how an
increase in the consumer confidence...
Assume that Lalaland is a small open economy. Explain how an increase in consumer confidence in...
Assume that Lalaland is a small open economy. Explain how an increase in consumer confidence in the rest of the world (i.e., an increase in autonomous consumption) affects the world interest rate and the Lalaland interest rate, level of investment, net exports and net capital outflows. Support your answer with a graph of the rest of the world loanable funds market and a graph of the loanable funds market of Lalaland.
1. Consider a small open economy where an increase in business confidence leads to an increase...
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1. Consider a small open economy where an increase in business confidence leads to an increase...
1. Consider a small open economy where an increase in business confidence leads to an increase in investment expenditure. Examine the loanable funds market and show what happens to Investment, National Saving, real interest rates, capital flows and the current account (net exports). Examine the market for foreign exchange and show what happens to the real exchange rate. Now consider that the country is not so small, what else might change, how might your answer differ?
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Please just draw the graphs. No need to explain/write out the rest. Thanks! 1. Assume that...
Please just draw the graphs. No need to explain/write out the
rest. Thanks!
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Please just draw the graphs. No need to explain/write out the
rest. Thanks!
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