What are the effects of an increase in the supply of loanable funds?
A) Net capital outflow and the real exchange rate both increase.
B) Net capital outflow and the real exchange rate both decrease.
C) Net capital outflow increases, and the real exchange rate decreases.
D) Net capital outflow decreases, and the real exchange rate increases.

Question

Quizplus · Accepted Answer

An increase in the supply of loanable funds lowers the interest rate, which encourages more investment domestically and abroad. This leads to an increase in net capital outflow as domestic investors seek higher returns in foreign markets. The increased demand for foreign currency to invest abroad depreciates the domestic currency, leading to a decrease in the real exchange rate.

What Are the Effects of an Increase in the Supply