Foreign Capital Inflow
The question
Investors abroad come to see the economy of Doria as a safe and attractive place to lend, and large amounts of foreign savings flow into Doria's financial markets. Assume domestic firms' desired investment at each real interest rate is unchanged. Show the effect of this inflow in Doria's loanable funds market. Show the effect on the Loanable Funds Market graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Foreign Capital Inflow: the worked answer
On the Loanable Funds Market graph, Supply of loanable funds shifts right.
Why Supply of loanable funds shifts right
The supply of loanable funds is the total pool of saving available to borrowers, which in an open economy includes savings that flow in from abroad. When foreign capital enters Doria's financial markets, more funds are available to lend at every real interest rate, shifting the supply of loanable funds to the right. Domestic investment demand is unchanged by assumption, so the demand curve stays put.
What happens to the equilibrium
The equilibrium real interest rate falls and the equilibrium quantity of loanable funds increases.
The mistake students make on this one
Students frequently shift demand right because foreign investors are buying Dorian assets, and buying sounds like demanding. In this market, buying a bond is lending, so the foreign investors join the supply side; the demanders are the firms and the government issuing those bonds.
On exam day
Translate every financial story into lender or borrower before you draw anything. Bond buyers supply loanable funds and bond issuers demand them, whatever the nationality of either side.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Supply of loanable funds shifts right and every other curve on the Loanable Funds Market graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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