Figure 33-3

Refer to the following diagram of the open-economy macroeconomic model to answer the questions that follow.

Graph (a) Graph (b)

Graph (c)

Refer to Figure 33-3. Suppose that U.S. firms desire to purchase more equipment and build more factories and stores in the United States. The effects of this are illustrated by

Question

Figure 33-3

Refer to the following diagram of the open-economy macroeconomic model to answer the questions that follow.

​

Graph (a)	Graph (b)
	
 	Graph (c)

​

Refer to Figure 33-3. Suppose that U.S. firms desire to purchase more equipment and build more factories and stores in the United States. The effects of this are illustrated by

BlackTom AI · Accepted Answer

An increase in U.S. firms’ desired investment raises the demand for loanable funds, so the demand curve in the loanable funds market shifts right.

1) Relevant knowledge points and concepts
- Market for loanable funds (graph a): investment demand determines the demand for loanable funds; higher desired investment shifts this demand right, raising the real interest rate.  
- Net capital outflow (NCO) vs. real interest rate (graph b): NCO is negatively related to the domestic real interest rate (higher r → fewer capital outflows).  
- Foreign exchange (graph c): the supply of dollars in the foreign-exchange market equals net capital outflow; a fall in NCO reduces the supply of dollars, shifting the supply curve left and causing the real exchange rate to appreciate.

2) Step-by-step reasoning process
- Step 1: U.S. firms want more equipment and factories → desired domestic investment increases.  
- Step 2: In graph (a), this is a rightward shift of the demand for loanable funds. Equilibrium moves to a higher real interest rate.  
- Step 3: On graph (b), the economy moves along the downward-sloping NCO curve to a lower NCO because the higher domestic real interest rate makes foreign investment less attractive relative to domestic investment. This is a movement along the curve (not a shift).  
- Step 4: Because the supply of dollars in the foreign-exchange market is equal to NCO, a decrease in NCO reduces the supply of dollars. In graph (c), the supply curve shifts left (a decrease in supply), raising the real exchange rate (dollar appreciation).

3) Intermediate steps / movement details
- Demand for loanable funds: D_LF → D'_LF (right).  
- Real interest rate: r → r' (increases).  
- NCO: NCO(r) → NCO(r') (decreases; movement along the NCO curve).  
- Supply of dollars: S_dollars = NCO → S'_dollars (shifts left).

4) Why the correct answer is correct
The chain D_LF right → higher r → lower NCO → leftward shift of dollar supply precisely matches “shifting the demand curve in panel a to the right and the supply curve in graph (c) to the left.”

5) Why other options are incorrect (brief)
- Shifting supply in panel a is wrong because the change originates from increased investment demand, not an increase in savings or supply of loanable funds.  
- Shifting the demand curve in graph (c) is incorrect because demand for dollars there is driven by net exports; the immediate effect of higher investment is on NCO (supply of dollars), not directly on demand for dollars.

6) Conclusion
Therefore, the effects are illustrated by shifting the demand curve in panel (a) to the right and the supply curve in graph (c) to the left, which matches the provided answer.

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