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Wize AP Macroeconomics Textbook > Macroeconomic Theory of the Small Open Economy

Capital Flight

Supply and Demand of Foreign CurrencyPrevious Section
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Capital Flight

Capital Flight is when there is a large and sudden reduction in the demand for assets from a country. It can be caused by political instability. This country will have to pay a higher risk premium on its financial assets (bonds).
  • This would cause supply of loanable funds to shift
    left
    . The higher risk premium would could cause the interest rate to go higher and the net capital outflow (NCO) to
    increase
    .
  • The supply of dollars shifts to the
    right
  • The dollar will
    depreciate
    and net exports will
    increase
    .