For a closed economy, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:
A) vertical line at 0.
B) horizontal line at the world real interest rate.
C) line that slopes up and to the right.
D) line that slopes down and to the right.

Question

Quizplus · Accepted Answer

In a closed economy, there is no international trade in goods and services or financial assets, meaning there are no capital flows into or out of the economy. Therefore, net capital outflow is always zero, regardless of the real interest rate, which is represented as a vertical line at 0 on a graph where net capital outflow is on the horizontal axis and the real interest rate is on the vertical axis.

For a Closed Economy, When Net Capital Outflow Is Measured