If there is capital flight from Canada, how does the open-economy macroeconomic model change?
A) Both the supply of loanable funds and the supply of dollars for foreign exchange curves shift right.
B) Both the supply of loanable funds and the supply of dollars for foreign exchange curves shift left.
C) The supply of loanable funds shifts left, while the supply of dollars shifts right.
D) The supply of loanable funds shifts right, while the supply of dollars shifts left.

Question

Quizplus · Accepted Answer

Capital flight from Canada implies that investors are moving their funds out of Canada to other countries. This would decrease the supply of loanable funds in Canada as there are fewer funds available for lending, shifting the supply of loanable funds curve to the left. At the same time, to move their funds out, investors would need to convert Canadian dollars into foreign currencies, increasing the supply of Canadian dollars in the foreign exchange market, which shifts the supply of dollars curve to the right.

If There Is Capital Flight from Canada, How Does the Open-Economy