Question

ECO - 252 - Macroeconomics

6. Suppose that U.S. citizens start saving less. What does it imply about the supply of loanable funds and the

equilibrium real interest rate? What happens to the real exchange rate?

Answer 1

Solution:-Suppose that U.S. citizens start saving less.It imply about the supply of loanable funds increses and the equilibrium real interest rate decreases.If the US starts saving more, the supply of loanable funds will increase, and the equilibrium real interest rate will fall. Due to the lower interest rate, U.S. net capital outflow rises. This increase makes the supply of dollars shift to the right, and the real exchange rate of the dollar depreciates.Decreased exchange rates decrease capital outflow and cause the real exchange rate of the dollar to depreciate.