5. Capital flight The graphs below depict the loanable funds market and the relationship between real interest rates and the level of net capital outflow (NCO) calculated in terms of the Mexican peso. The Market for Loanable Funds in Mexico Mexican Net Capital Outflow 9 8 Supply 6 REAL INTEREST RATE (Percent) 5 REAL INTEREST RATE (Percent) NCO Demand 2 2 2 5 6 7 8 -4 -3 -2 -1 0 1 2 3 4 5 6 LOANABLE FUNDS (Billions of pesos) NET CAPITAL OUTFLOW (Billions of pesos)Complete the first row of the table to reflect the state of the markets in Mexico. Real Interest Rate Net Capital Outflow (NCO) (Percent) (Billions of pesos) Initial state After capital flight Suppose now that a sudden bout of political turmoil in Mexico causes world financial markets to become uneasy. Because investors now see Mexico as unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand for assets in Mexico is known as capital flight. Shift the NCO curve to illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the supply curve, the demand curve, or both curves to reflect the change caused by the shift in NCO. Note: You will not be graded on your final placement of the curves on the graph, but you will need to shift them correctly in order to answer the questions that follow. Determine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO that occurs along the new NCO curve at the new equilibrium interest rate. Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both.Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both. The Market for Foreign-Currency Exchange Supply O Demand O Supply REAL EXCHANGE RATE (Dollars per peso) Demand QUANTITY OF PESOSSummarize the results of capital flight by completing the following table. Real Interest Rate Real Exchange Rate Net Capital Outflow Effects of capital flightDecrease Summarize the results of capital mpleting the following table. Increase Re Rate Real Exchange Rate Net Capital Outflow Effects of capital flightIncrease Summarize the results of capital flight by completing the ble. Decrease Real Interest Rate Rea e Rate Net Capital Outflow Effects of capital flightDecrease Summarize the results of capital flight by completing the following table. Increase Real Interest Rate Real Exchange Rate Ne Itflow Effects of capital flight4. Analyzing the effects of a trade deficit Suppose the U.S. government has just hired you to analyze the following scenario. Assume the U.S. manufacturing industry grows concerned about competition from lowcost producers overseas exporting their goods to the United States, a practice that harms domestic producers. Industry experts claim that implementing a tariff on imports would reduce the size of the trade deficit. Complete the following exercise in order to help you analyze this claim. The following graph shows the demand and supply of U.S. dollars in a model of the foreigncurrency exchange market. Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the tariff. Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the tariff. Supply O Demand Supply REAL EXCHANGE RATE (Units of foreign currency per dollar) Demand QUANTITY OF DOLLARS Given this change, the dollar Fill in the following table with the effect of a tariff on the following items:Given this change, the dollar 7 . Fill in the following table with the effect of a tariff on the following items: Supplyr of Loanable Funds Real Interest Rate Net Capital Outflow Net Exports Change due to a tariff V Y Y Y Given this change, the dollar Fill in the following table with appreciates tariff on the following items: depreciates Supply of Loanable Funds Real Interest RateGiven this change, the dollar Increase Fill in the following table with the e if on the following items: Decrease No change Supp le Funds Real Interest Rate Net Capital Outflow Net Exports Change due to a tariff