Question

2. Introduction to the foreign-currency exchange market In an open economy, why is the supply curve for dollars in the foreign-currency exchange market vertical? Net capital outflow equals net exports. Net capital outflow is determined by real GDP, not the real exchange rate. Net capital outflow is determined by the real interest rate, not the real exchange rate. Net capital outflow is extremely sensitive to small changes in the real exchange rate.

Answer 1

Answer:

The answer is  Net capital outflow is determined by the real interest rate, not the real exchange rate.

Explanation:

Because the difference between imports and exports must be the same difference between purhcases and sale of foreign capital. The supply curve is vertical because the amount of dollars supplied for net capital outflow is not related to the real exchange rate.

The level will be determined by the real interest rate in the market for loanable funds.