Figure 14-7

-Refer to Figure 14-7. Supposing that the Mexican economy starts at r₀ and E₁. Which of the following is consistent with the effects of capital flight?

Question

Figure 14-7 -Refer to Figure 14-7. Supposing that the Mexican economy starts at r₀ and E₁. Which of the following is consistent with the effects of capital flight?

Quizplus · Accepted Answer

Capital flight refers to the movement of capital out of a country due to economic or political uncertainty. This results in a decrease in the supply of loanable funds, causing an increase in the interest rate and a decrease in investment. In Figure 14-7, all three panels show an increase in the interest rate (r) and a decrease in investment (I) due to a shift in the supply of loanable funds curve to the left (from to _{). Therefore, all three shifts are consistent with the effects of capital flight, and the correct answer is D.}

Figure 14-7 -Refer to Figure 14-7. Supposing That the Mexican Economy Starts