If investors in a large open economy become more willing to substitute foreign and domestic assets, then this will make the net capital outflow function:

Question

Quizplus · Accepted Answer

When investors are more willing to substitute between foreign and domestic assets, the net capital outflow function becomes flatter, indicating that capital flows are more responsive to changes in the interest rate. This increased responsiveness also makes the IS curve flatter, as changes in the interest rate have a larger effect on net exports and thus on aggregate demand.

If Investors in a Large Open Economy Become More Willing