Figure 32-7
Refer to this diagram of the open-economy macroeconomic model of the Mexican economy to answer the questions below.
-Refer to Figure 32-7.Suppose that the Mexican economy starts at r2 and e3.Which of the following is consistent with the effects of capital flight?
A)a shift from D2 to D1 in Panel A
B)a shift from NCO1 to NCO2 in Panel B
C)a shift from D2 to D1 in Panel C
D)All of the above shifts are consistent with the effects of capital flight.

Question

Figure 32-7
Refer to this diagram of the open-economy macroeconomic model of the Mexican economy to answer the questions below. 
-Refer to Figure 32-7.Suppose that the Mexican economy starts at r2 and e3.Which of the following is consistent with the effects of capital flight?
A)a shift from D2 to D1 in Panel A 
B)a shift from NCO1 to NCO2 in Panel B 
C)a shift from D2 to D1 in Panel C 
D)All of the above shifts are consistent with the effects of capital flight.

Quizplus · Accepted Answer

Capital flight refers to the movement of capital out of a country due to economic or political instability. This results in a decrease in the supply of loanable funds and an increase in the demand for foreign currency, which in turn, leads to a higher exchange rate and a lower level of net capital outflow (NCO). Therefore, the shift from NCO1 to NCO2 in Panel B is consistent with the effects of capital flight. Choices A and C are not correct as they refer to shifts in the domestic demand for loanable funds, which are not directly affected by capital flight.

Figure 32-7 Refer to This Diagram of the Open-Economy Macroeconomic Model of Model