In the open-economy macroeconomic model,if the supply of loanable funds increases,net capital outflow
A)and the real exchange rate increase.
B)and the real exchange rate decrease.
C)increases and the real exchange rate decreases.
D)decreases and the real exchange rate increases.

Question

Quizplus · Accepted Answer

The supply of loanable funds represents the amount of savings available for investment. An increase in the supply of loanable funds will decrease the interest rate, which in turn will increase borrowing for investments abroad, increasing net capital outflow. The increase in net capital outflow will cause the demand for foreign currencies to increase, leading to a decrease in the domestic currency's value, thus decreasing the real exchange rate. Therefore, option C, increases in net capital outflow and the decrease in the real exchange rate is the correct answer.

In the Open-Economy Macroeconomic Model,if the Supply of Loanable Funds