Figure 5.4

Suppose the world consists of two large open economies, Canada and the rest of the world. The figures above represent loanable funds graphs for these two economies.
-Refer to Figure 5.4.The international capital market will be in equilibrium when the real interest rate in Canada is ________ and the real interest rate in the rest of the world is ________.

Question

Figure 5.4

Suppose the world consists of two large open economies, Canada and the rest of the world. The figures above represent loanable funds graphs for these two economies.
-Refer to Figure 5.4.The international capital market will be in equilibrium when the real interest rate in Canada is ________ and the real interest rate in the rest of the world is ________.

Quizplus · Accepted Answer

In order to achieve equilibrium in the international capital market, the real interest rates in Canada and the rest of the world must be equal. From the graph, we can see that this occurs at a real interest rate of 5% for both Canada and the rest of the world. Therefore, the answer is D (5%; 5%).

Figure 5.4 Suppose the World Consists of Two Large Open Economies, Canada