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Chapter 19 Reflection


Question 1: How does a country's national savings impact net capital outflow?


Poor response: 
 If people save money, they can buy more things.

Thoughtful response: 
The national savings is the supply of loanable funds. So more savings means that more loans can be made. These loans are used to purchase capital assets either at home or abroad. So a country that has savings is able to more fully participate in the marketplace, and some of that money will likely be a part of net capital outflow.

Question 2: How are net capital outflow and net exports related to foreign exchange?


Poor response: 
In both cases, things are leaving the country.

Thoughtful response: 
Net capital outflow represents the amount of currency supplied to the foreign markets. Net exports represents the amount of currency demanded by foreign markets for the purpose of trading with another nation. The dollars that leave the country through net capital outflow are the same dollars that will be used to buy US exports.


Question 3: Why might political instability cause a nation's currency to depreciate?


Poor response: 
If people don't trust the government, then the currency won't be in demand.
Thoughtful response: 
If instability causes investors to withdraw and move their money to another country, then there is a large amount of currency being converted. This increases the supply of the unstable country's currency. In turn, the currency depreciates because supply is greater than demand.








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