Chapter 32 Journal

Chapter 32 goes more into the theory of open economies. There are two central markets to the open economy: The market for loanable funds and the market for foreign currency exchange. In the market for loanable funds, the real interest rate adjusts to balance the supply of loanable funds and the demand for loanable funds from domestic investment and net capital outflow. In the market for foreign-currency exchange, the real dollars and the demand for dollars. Because net capital outflow is part of the demand for loanable funds and because it provides the supply of dollars for foreign-currency exchange, it is the variable that connects these two markets. A policy that reduces national saving, such as a government budget deficit, reduces the supply of loanable funds and drives up the interest rate. The higher the interest rate reduces net capital outflow, which reduces the supply of dollars in the market for foreign-currency exchange. The dollar appreciates, and net exports fall. Although restrictive trade policies are sometimes advocated as a way to alter the trade balance, they do not necessarily have that effect. A trade restriction increases net exports for a given exchange rate and, therefore, increases the demand for dollars in the market for foreign-currency exchange. As a result, the dollar appreciates in value, making domestic goods more expensive relative to foreign goods. This appreciation offsets the initial impact f the trade restriction on net exports. Overall, the chapter was pretty simple to grasp. On a scale of 1-3 I would rate this chapter a 1. I have no questions about this chapter.