Suppose that the equilibrium interest rate in the U.S. market for loanable funds is 3% prior to any international capital flows in the United States. The equilibrium interest rate in the Japanese market for loanable funds is 7%. If lenders in both nations believe that loans to foreigners are just as good as loans to their own citizens, capital will flow from _____, making interest rates _____ in Japan and _____ in the United States.

Question

Quizplus · Accepted Answer

Capital will flow from the United States to Japan because lenders seek the highest return, which is initially higher in Japan (7%) compared to the United States (3%). This capital inflow will increase the supply of loanable funds in Japan, causing interest rates to fall there. Conversely, the outflow of capital from the United States will reduce the supply of loanable funds, causing interest rates to rise in the United States.

Suppose That the Equilibrium Interest Rate in the U