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Suppose that the world interest rate rises. A. If the elasticity of nantional saving in relation...

Suppose that the world interest rate rises.

A. If the elasticity of nantional saving in relation to the world interest rate is very high, will this rise in the world interest rate have a large or small effect on America's net capital outflow?

B. If the elasticity of America's exports in relation to the real exchange rate is very low, will this rise in the world interest rate have a large or small effect on America's real exchange rate?

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Answer #1

A. If the elasticity is high, then rise in the world interest rates will have a large effect on America's net capital outflow. This is because savings will move to the countries in which rate of return are high and there will be net capital outflow from America as world interest rate rises compared to American interest rates.

B. Since exports will not be impacted much with the rise in the interest rate as elasticity of America's exports in relation to the real exchange rate is very low, thus rise in the world interest rate will have a small effect on America's real exchange rate.

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