Question

1. If Net Capital Outflow increases, the ________ of dollars in the Foreign Currency Exchange Market will increase, causing the real exchange rate to ________. 2. If Net Capital Outflow increases, the ________ of dollars in the Foreign Currency Exchange Market will increase, causing the real exchange rate to ________.

Answer 1

Answer: Supply / Depreciate

1 and 2 are the same question hence the same answer.

That translates as; If Net Capital Outflow increases, the supply of dollars in the Foreign Currency Exchange Market will increase causing the real exchange rate to depreciate.

Let's first define Net Capital Outflow. This is basically the net amount of money a country invests abroad in a year. So every import counts towards net capital flow. If a country has a positive Net Capital outflow, that means the country invests abroad more than the world invests in the country. It's also the difference between the purchase of foreign assets by residents of said country and the purchase of domestic assets by foreigners.

Hence, if the Net Capital Outflow in the US increases, people will need more foreign currency to buy foreign assets so the supply of dollars into the foreign market increases The real exchange rate declines or depreciates in turn, making U.S. goods more cheaper relative to foreign goods. The real exchange rate basically is the ratio price of foreign goods to the domestic equivalent.

Answer 2

Answer:

1, supply, depreciate

Explanation:

If Net Capital Outflow increases, the supply of dollars in the Foreign Currency Exchange Market will increase, causing the real exchange rate to depreciate