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 Demand Supply 0 1 2 3 4 5 6 7 8 9 8 7 6 5 4 3 2 1 REAL INTEREST RATE (Percent) LOANABLE FUNDS (Billions of pesos) Demand Supply Mexican Net Capital Outflow NCO -4 -3 -2 -1 0 1 2 3 4 5 6 9 8 7 6 5 4 3 2 1 REAL INTEREST RATE (Percent) NET CAPITAL OUTFLOW (Billions of pesos) NCO 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