What is the variable that links the loanable funds market and the foreign-currency exchange market?
A) net capital outflow
B) national saving
C) exports
D) imports

Question

Quizplus · Accepted Answer

The variable that links the loanable funds market and the foreign-currency exchange market is net capital outflow, which is the difference between the amount of domestic saving and the amount of domestic investment. Net capital outflow represents the net flow of funds from one country to another and affects both the loanable funds market and the foreign-currency exchange market. When net capital outflow is positive (meaning that domestic investment is less than domestic saving), there is a surplus of loanable funds, which lowers the interest rate and leads to an increase in the demand for foreign currency, causing the domestic currency to depreciate. Conversely, when net capital outflow is negative (meaning that domestic investment is greater than domestic saving), there is a shortage of loanable funds, which raises the interest rate and leads to a decrease in the demand for foreign currency, causing the domestic currency to appreciate.

What Is the Variable That Links the Loanable Funds Market