Q1: How is the equilibrium of interest rates naturally reached for loanable funds?
Adequate Response: This equilibrium is reached by the amount of people who want to save exactly balancing with the desired quantities of domestic investment and net capital outflow.
Very Good Response: For the equilibrium to be reached, the amount of people who want to safe would need to be perfectly balanced with the amount of desired domestic investments and net capital outflow. Of course, it is impossible for this to happen naturally, however that equilibrium point must still be reached. The way this happens is very simple: if the interest point is below the equilibrium, the quantity of loanable funds supplied is less than the quantity demanded. In turn this makes the interest rate rise and discourage demand. If the interest rate was above the equilibrium, the quantity of loanable funds would exceed the demand and the excess fund would drive the interest rates downward, encouraging more demand.
Q2: How is the equilibrium for foreign-currency exchange naturally reached, and how is this idea similar to the previous?
Adequate Response: When the real exchange rate appreciates, the goods from that country become more expensive and therefore less attractive in both the foreign and domestic markets. This is similar to the previous question because it’s a cause and effect system for supply and demand.
Very Good Answer: Similar to the previous answer, this one deals with the perfect balance of supply and demand, except in this case, we are looking at the foreign currency exchange. The thing that keeps it balanced is the real-exchange rate, similar to the effect that the real interest rate has in the market for loanable funds. The net capital outflow does not depend on the real exchange rate due to the cost of purchasing dollars back if you earn dividends in a foreign currency.
Q3: What might be some positives about being in trade deficit with a country like China?
Adequate Answer: Some positive things may be a stronger currency and the consumption of advanced technologies.
Very Good answer: While the ideal situation to be in would probably be a more balanced one, being in a trade deficit allows the U.S. to have the upper hand in negotiations, for example being in deficit with China could justify placing tariffs on goods. Another benefit is that U.S. consumers enjoy of many technologies made in China that are being exported instead of kept domestic, which allows consumers to get these technologies at lower prices than they would if they were manufactured here.
Eli's blog 