Answer to Question #150316 in Macroeconomics for Kane

Question

Using the same scenarios from questions 3-5. Answer the following questions involving the loanable funds market.
An increase in British imports of American goods.
What happens to capital flows initially in this scenario? (Which country is experiencing capital inflow and outflow)
Graphically illustrate the change in the loanable funds market for the U.S. given the information gathered in question A. Be sure to label your graph.
What impact did this have on domestic real interest rate?

Answer 1

In the event of an increase in British imports of American goods, Britain has an outflow of capital, the United States has an inflow of capital

In a country with a large open economy, there is a positive relationship between capital inflows and the value of the domestic interest rate: CF - f(r)