Answer to Question #277158 in Microeconomics for Takia

Question

Increase in net capital inflow will increase interest rates in the domestic loanable funds 

market” – do you agree with this statement? Explain by drawing a diagram and

comment how you think investment will change if there is an increase in capital inflow. 

Answer 1

Yes. Any change in money flow affects the supply curve for loanable funds.

An increase in money inflows result to a rise in the current account deficit, a lower long-term interest rate and a higher real exchange rate. If the interest rates go up, the Money inflow increase more, despite other factors remaining balanced, there will be no business incentive to lower the inflows.

When the capital flows into the stock business, the income rises but the investments decreases.