Net Capital Outflow and Supply and Demand of Foreign Currency
Affect of Interest Rates on Exchange Rates
- The supply of dollars - this is the supply of our domestic dollars available to other countries. It is the net capital outflow.
- The demand for dollars - this is how much domestic dollars foreign countries are demanding. It comes from our net exports. As demand for our exports increase that means other countries will demand more of our domestic dollars to buy those goods.
Factors that Affect the Exchange Rate
1. Increase in world interest rate - this will cause a ________ NCO and the supply of dollars to shift ________. The dollar will ________ and next exports will ________
2. Government deficit - this will cause national savings and supply of loanable funds to ________. The NCO will be ________ and so the supply of dollars shifts ________. The dollar will ________ and net exports will ________
3. Import Quotas/Tariffs
