Figure 01: (i) Market for Loanable Funds; (ii) Net Capital Outflows; and (ii) Ma

Question

Figure 01: (i) Market for Loanable Funds; (ii) Net Capital Outflows; and (ii) Market for Foreign-Currency Exchange Real Interest Rate Real Interest Rate Si DI D2 0) Quantity of (n) Net Capital Outflows Loanable Funds Real S1 S2 S3 E- DI D2 Quantity of Dragon Coins Question 07 Using Figure 01, suppose that the Klingon economy starts at r: and Es. Which of the following events is consistent with the effects of capital flight? (Note: There may be additional shifts/movements not identified in the answer.) a. A shift from D, to D, in Graph (i) b. A shift from NCO, to NCO in Graph (ii). e. A shift from D, to D, in Graph (iii). d. All of the above

Explanation / Answer

The answer is option b

Reason: Capital flight is the rapid outflow of assets and money from a country due to economic consequences occurring in the country. The capital outflow occurs due to loss of confidence on the side of investors thus they tend to supply less even at higher interest rates.

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