Revise later
SpaceTo flip
If confident
All Flashcards
What are capital flows?
The movement of money across borders for investment, trade, or production.
Define inbound capital flow.
Foreign investors purchase domestic assets.
Define outbound capital flow.
Domestic investors purchase foreign assets.
What drives capital flows?
The search for higher returns.
What happens when foreign investors purchase domestic assets?
Increases demand for the domestic currency and increases the supply of loanable funds.
What happens when domestic investors purchase foreign assets?
Increases demand for the foreign currency and decreases the supply of loanable funds at home.
What is the effect of high real interest rates on capital flow?
Attract inbound capital flow.
What is the effect of low real interest rates on capital flow?
Lead to outbound capital flow.
What is the impact of capital flows on the supply of loanable funds?
Capital flows can shift the supply of loanable funds.
What is the impact of capital flows on the demand for a currency?
Capital flows can shift the demand for a currency.
How does higher real interest rates in the US affect Japanese investors?
Attracts them to buy US Treasury bonds for better returns.
How do lower real interest rates in the US affect American investors?
Pushes them to seek higher returns abroad, like buying German bonds.
How does a significant outflow of capital affect the domestic loanable funds market?
Decreases the supply of loanable funds.
How does a higher real interest rate in the US compared to Canada affect capital flow?
Leads to an inflow of capital from Canada to the United States.
What happens to the value of the U.S. dollar relative to the euro if the real interest rate in the U.S. is higher?
The U.S. dollar will appreciate relative to the euro.
How does the appreciation of the U.S. dollar affect U.S. net exports?
Net exports of the United States will decrease.
How does an increase in demand for a country's currency affect its exports?
An increase in demand for a country's currency makes its exports more expensive.
How does an increase in demand for a country's currency affect its imports?
An increase in demand for a country's currency makes its imports cheaper.
If interest rates are higher in Japan than in the U.S., what do American investors do?
American investors want to buy Japanese assets.
If interest rates are higher in Japan than in the U.S., what happens to demand for the Japanese Yen?
They increase their demand for the Japanese Yen to do so.
What does a rightward shift of the supply curve of loanable funds indicate?
A lower real interest rate.
On a loanable funds market graph, what labels should be on the axes?
"Quantity of Loanable Funds" on the horizontal axis and "Real Interest Rate" on the vertical axis.
What does a downward-sloping curve represent on a loanable funds market graph?
Demand curve for loanable funds.
What does an upward-sloping curve represent on a loanable funds market graph?
Supply curve for loanable funds.
How does capital inflow affect the supply curve of loanable funds?
Shifts the supply curve to the right.
What does the intersection of the supply and demand curves for loanable funds determine?
The equilibrium real interest rate.
If the supply of loanable funds increases, what happens to the real interest rate?
The real interest rate decreases.
If the demand for loanable funds increases, what happens to the real interest rate?
The real interest rate increases.
How does capital outflow affect the supply curve of loanable funds?
Shifts the supply curve to the left.
How does capital inflow affect the real interest rate?
Decreases the real interest rate.