Social Studies High School

The variable that links the market for loanable funds and the market for foreign-currency exchange is?

Answers

Answer 1

The variable that links the market for loanable funds and the market for foreign-currency exchange is the real interest rate. The real interest rate serves as a crucial factor that influences the flows of funds between these two markets.

In the context of the market for loanable funds, the real interest rate represents the cost of borrowing and the return on saving. It determines the willingness of individuals and businesses to borrow or save money. When the real interest rate is high, borrowing becomes more expensive, leading to a decrease in demand for loans. Conversely, when the real interest rate is low, borrowing becomes more affordable, increasing the demand for loans.

In the market for foreign-currency exchange, the real interest rate also plays a significant role. It affects the attractiveness of investing in different currencies. A higher real interest rate in one country relative to another can attract foreign investors seeking higher returns on their investments. This can lead to an increased demand for the currency of the country with the higher real interest rate, causing an appreciation of that currency. Conversely, a lower real interest rate can discourage foreign investment and result in a depreciation of the currency.

Therefore, changes in the real interest rate influence the flows of funds between the market for loanable funds and the market for foreign-currency exchange, connecting these two markets.

Learn more about interest here: brainly.com/question/30393144

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