Chapter 19 Macro Notes
Chapter 19 Macro Notes EC 111
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This 2 page Class Notes was uploaded by Carter Cox on Wednesday April 13, 2016. The Class Notes belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 18 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 04/13/16
Chapter 19 Macro Notes The Market for Loanable Funds - An identity from the preceding chapter o S= I+ NCO S= saving, I= domestic investment, NCO = net capital outflow - Supply of loanable funds is equal to saving - A dollar of saving can be used to finance o The purchase of domestic capital o Purchases of a foreign asset - Demand of loanable funds are equal to I + NCO - Recall o S depends positively on the real interest rate (r) o I depends negatively on (r) How NCO depends on the Real Interest Rate - Real interest rate is the real return on domestic assets - Fall in real interest rate makes domestic assets less attractive relative to foreign assets o People in US purchase more foreign assets o People abroad purchases fewer US assets o NCO rises Loanable Funds Diagram - Real interest rate adjusts to balance supply - Loanable funds is demand - Both I and NCO depend negatively on real interest rate, so demand curve is downward sloping Market for Foreign Currency Exchange - NCO = NX o NCO = Net capital outflow o NX = Net exports - NX is the demand for dollars o Foreigners need dollars to buy US net exports - NCO is the supply of dollars o US residents sell dollars to obtain the foreign currency they need to buy foreign assets - US real exchange rate (E) measures the quantity of foreign goods and service that trade for one unit of US goods and service o E is the real value of a dollar in the market for foreign currency exchange - An Increase in E has no effect on saving or investment, so it does not affect NCO or the supply of dollars Disentangled Supply and Demand - When a US resident buy imported goods does the transaction affect supply or demand in the foreign exchange market o The supply of dollars increase Person needs to sell her dollars to obtain the foreign currency she needs to buy the imports o Demand for dollars decrease Increase in imports reduce NX which we think of as the demand for dollars - When a foreigner buys a US asset, does the transaction affect supply o Demand in the foreign exchange market Demand for dollars in order to purchase the US asset o The supply of dollar falls Transaction reduces NCO which we think of as the supply of dollars - IN both of these the second is what we will use
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