The Market for Loanable Funds in Country 1 Is Described

question 105

Essay

The market for loanable funds in country 1 is described by the equations I = 18 - 6r and S = 8+4r; in country 2, it is I = 18 - 4r and S = 8 + 2r.
a) Find the relationships between net capital outflow and the world interest rate (rw) in the two countries.
b) What is the nature of these relationships? (Are they both positive, both negative, or one positive and the other negative?)
c) Calculate the world equilibrium interest rate.
d) How can you reconcile the result from part b with the one from part c?

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Definitions:

Overhead Cost

Indirect costs associated with manufacturing or producing goods, not directly tied to a specific product, including utilities, rent, and salaries of support staff.

Activity Cost Pools

Aggregations of all the costs associated with a particular business activity or process, used in activity-based costing.

Machine-Hours

A measure of the amount of time a machine is operated, used in allocating manufacturing costs to products.

Batches

Groups or sets of goods that are processed or produced together within a production cycle or process.