Chapter 32

Chapter 32 expands on how the market of loanable funds interacts with other variables in an open economy, such as with real interest rates and the amount of foreign currency available. When there's a change in one, the other variables will be noticeably affected by the change, along with net capital outflow and net exports. Three different graphs are used to explain key principles, being the market for loanable funds, net capital outflow, and the market for foreign-currency exchange. Deficits that happen in a government's budget causes the supply of funds to shift left, causing chain effects of a higher interest rate, less supply of foreign dollars, which causes real exchange rate to appreciate, which then causes imports to be more attractive to consumers than domestic goods, along with a lower net capital outflow due to the expensiveness of the exports compared to goods in other countries. There are multiple things that can happen to an economy, such as the budget deficit, to cause these chain reactions, and will have overall impacts in both the country's and world's economy. One important thing to take away from this is that no country is safe from capital flee, in which investors withdraw assets due to events or circumstances that may have happened.