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Posted 7 months ago
Westley is a citizen of Florin. He believes that the investment conditions in the neighboring country of Guilder are much better. Assume both countries have an open economy.
If other investors share Westley's opinion, what will happen to net capital inflows and the supply of loanable funds in Guilder?
Choose 1 answer:
(A) Net capital inflows will increase; the supply of loanable funds will increase
(B) Net capital inflows will increase; the supply of loanable funds will decrease
(c) Net capital inflows will decrease; the supply of loanable funds will increase
(D) Net capital flows will not change; the supply of loanable funds will increase
(E) Net capital flows will decrease; the supply of loanable funds will decrease
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Answer from Sia
Posted 7 months ago
Solution by Steps
step 1
Identify the key factors: Westley believes investment conditions in Guilder are better, and other investors share this opinion
step 2
Determine the impact on net capital inflows: If investors believe Guilder has better investment conditions, they will move their capital to Guilder, increasing net capital inflows
step 3
Determine the impact on the supply of loanable funds: Increased net capital inflows mean more funds are available for lending, thus increasing the supply of loanable funds in Guilder
Answer
A
Key Concept
Net capital inflows and supply of loanable funds
Explanation
When investors believe that investment conditions are better in a country, they move their capital to that country, increasing net capital inflows and the supply of loanable funds.
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