Figure 14-7

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

Question

Figure 14-7 -Refer to Figure 14-7. 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 leads to a decrease in the supply of loanable funds in the country, which causes the equilibrium interest rate to increase and the equilibrium level of investment to decrease. The new equilibrium should have a higher interest rate and a lower level of investment. Option B satisfies both of these conditions. Option A has a lower interest rate but the same level of investment. Option C has a higher interest rate but the same level of investment. Option D is not correct as option B satisfies the required conditions.

Figure 14-7 -Refer to Figure 14-7. Suppose the Mexican Economy Starts at Mexican