SUPPLY AND DEMAND FOR LOANABLE FUNDS AND FOR FOREIGN CURRENCY EXCHANGE

To understand the forces at work in an open economy, we focus on supply and demand in two markets. The first is the market for loan able funds, which coordinates the economy’s saving, investment, and the flow of loan able funds abroad (called the net capital outflow). The “second is the market for foreign-currency exchange, which coordinates people who want to exchange the domestic currency for the currency of other countries. In this section, we discuss supply and demand in each of these markets. In the next section, we put these markets together to explain the overall equilibrium for an open economy.