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. Suppose the Mexican economy starts at r₀ and E₁. Which of the following new equilibrium is consistent with capital flight?

Question

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. Suppose the Mexican economy starts at r₀ and E₁. Which of the following new equilibrium is consistent with capital flight?

Quizplus · Accepted Answer

Capital flight refers to the movement of assets or money out of a country due to political or economic instability. In this scenario, capital flight would lead to a decrease in the supply of loanable funds, causing the supply curve to shift leftward from S1U1B10 to S1U1B11. At the same time, there would be an increase in the demand for foreign currency as investors try to convert their domestic currency to a more stable foreign currency. This would cause the exchange rate to depreciate, leading to a leftward shift of the foreign currency exchange curve from ES1U1B11 to ES1U1B10. The new equilibrium consistent with capital flight would be where the two curves intersect, which is rS1U1B11S1U1B0 and ES1U1B10S1U1B0, hence the correct answer is B.

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