Questions Assignment Example | Topics and Well Written Essays - 1000 words

Questions - Assignment ExampleFlow of capital is determined by very interest rates. When domestic true(a) interest rates rise, the domestic assets ferment more attractive to impertinent investors. These investors buy this countrys assets assets resulting in capital inflow. Higher interest rates also induces domestic investors to buy station assets instead of foreign ones. This significantly reduces the amount of capital outflow. This leads to a decline in the moolah capital outflow. A decrease in the domestic rattling interest rate go away substantially reduce investors returns from their investments. This will discourage foreign investors from investing locally hence reducing capital inflow. Domestic investors will shift their investments to countries with rising real interest rates thus increasing capital outflow. This will ultimately lead to increased net capital outflow. relationship among saving, investment, and net capital outflow. According to Lukes (1959), disposable income is used for consumption and investment. The amount of money merelyd is the one used for investments and therefore investment is equal to savings. The centre amount of a countrys savings is used for domestic investment and grease ones palms of capital goods abroad. As explained above, net capital outflow is the net flow of funds being invested in new(prenominal) countries by a country during a certain period of time. ... In economics, the term investment refers to purchase of new capital and other factors of production often through the use of loans. As shown in the graph below, the demand curve in the loanable market is downward(prenominal) sloping from left to right while the supply curve in the same market is downward sloping from right to left. According to John ( 1936), when the real interest rate increases, the cost of taking loans increases. This leads to low investment as investors shy away from acquiring loans to fund investments due to the increased costs. On th e other hand, when the real interest rates are low, the cost of taking loans reduces hence loans becomes more attractive to investors. This translates to increased investments. When the real interest rate rises, people save more in order to take advantage of the increased returns on their savings. Therefore, there will be increased money saved in the economy. On the other hand, when the real interest rate decreases, people will be discouraged from saving by the low returns they get due to lower real interest rates, leading to low savings. The foreign exchange market is a market for trading of bills. In this market, one party exchanges one countrys currency with an equivalent quantity of another currency. The exchange rate is the price of one currency in terms of another currency. The major role of foreign exchange market is to facilitate the loanable funds market. Foreign goods are usually priced in foreign currency and therefore an investor will need foreign currency to buy foreig n assets. The rate at which a currency is exchanged for another is determined by the demand and supply of that currency. The higher the demand for financial assets in a