Question

If there is capital flight from the United States, then the demand for loanable funds a. shifts left while the supply of dollars in the foreign-exchange market shifts right. b. and the supply of dollars in the foreign-exchange market shift left. c. shifts right while the supply of dollars in the foreign-exchange market shifts left. d. and the supply of dollars in the foreign-exchange market shift right.

Answer 1

Answer: Option (c) is correct.

Explanation:

If a country is suffers from capital flight, then the demand for loanable funds shifts rightwards while the supply of dollars in the foreign exchange market shifts leftwards.

Capital flight means that there is a outflow of capital from United States to other countries. This will results in lower interest rate, as a result loans become cheaper. So, it will become affordable for the individuals to take loans for their needs.

Hence, the demand for loanable funds increases at a lower interest rate and supply of US dollar also shifts leftwards.