Question

Agree or disagree & explain why

Capital flight is a large and sudden reduction in the demand for assets located in a country. When a country experiences capital flight the interest rate rises because the demand for loanable funds increases. The exchange rate falls and raises the net exports. There is an increase in net capital outflow. This increases the supply of money, causing the peso to depreciate. Depreciation is a decrease in the value of a currency measured by the amount of foreign currency it can buy. A country can experience this when they are looking unstable and people decide to pull their assets.

Answer 1

"Agree"

A capital flight is a situation when the market of a nation is unstable and people decide to pull the money out of the nation market. It increases the demand for the foreign national currency and depreciate the local currency. at a lower exchange rate the exports become cheaper and it increases and imports decrease. But too much capital flight is harmful for the economy so the central bank increase the interest rate that increase the opportunity cost of holding the money in the nation. It decrease the flight. Example of capital flight is Asian tiger crisis in 1997.