The diagram below represents the market for loanable funds and the market for foreign-currency exchange in Mexico. Use the diagram to answer the following questions.Figure 19-7 -Refer to Figure 19-7. Supposing that the Mexican economy starts at r₀ and E₁. Which of the following is consistent with the effects of capital flight? A)the shift from D₀ to D₁ in Panel A B)the shift from NCO₀ to NCO₁ in Panel B C)the shift from S₀ to S₁ in Panel C D)All of the above shifts are consistent with the effects of capital flight.

Question

Quizplus · Accepted Answer

Capital flight refers to the movement of capital away from a country due to political or economic instability, leading to a decrease in the supply of loanable funds and an increase in demand for foreign currency. This can be seen in the diagram as a shift of the supply curve to the left in Panel A (D₀ to D₁), a shift of the demand curve to the right in Panel B (NCO₀ to NCO₁), and a shift of the supply curve to the left in Panel C (S₀ to S₁). Therefore, all of the above shifts are consistent with the effects of capital flight.

The Diagram Below Represents the Market for Loanable Funds and the Market