Chapter 32

Chapter 32 focuses on the market for loanable funds. One of two markets, the other being the market for foreign exchange. To begin and aid with explaining, one can look to the previous equation, savings equals domestic investment plus net capital outflow. In foreign market exchange, the real exchange rate adjusts to balance the supply of dollars and the demand of dollars. Since net capital outflow effects both the loanable funds market and the foreign currency exchange market, it is the variable that connects the two markets. Government policies that reduce national saving such as government budget defect reduces the supply of loanable funds while  increasing the interest rate. This higher interest rate reduces net capital outflow, which then reduces the supply of dollars in the market for foreign exchange The dollar's appreciation causes the next exports to fall as prices for exchanging to dollars go up for foreigners so they buy less goods and services. Tariffs and trade quotas help balance trade, however they do not always work one hundred percent of the time. Trade restrictions increase net exports which then increases the demand for dollars in the foreign currency exchange market. This causes the value of dollars to rise compared to the value of foreign goods. This effect causes an offset in the initial impact of trade restrictions on next exports. If for any particular reason, investors that invest in another country change their opinions and thoughts, it could cause serious changes to that country's economy.  Political instability can lead to capital flight, or the removal of foreign investments, which increases interest rates and depreciates the currency