# The Effects of Shifts in the NCO Curve on the Medium-Run International Finance Diagram are Not Ambiguous After All

• Assume that the Supply of Loanable Funds curve is upward-sloping
• Assume that the I-curve is downward sloping.
• Both of these assumptions are crucial to what follows.
• Now, Consider a case when the NCO-curve shifts out. (After you read the rest of this post, make sure you work through the case when the NCO curve shifts back for yourself. Actually, in general you should always work through the opposite directions of things as part of your studying. The simplest way to make an exam question is to do the opposite direction from what was covered in class.)
• Since the Demand for Loanable Funds is the horizontal sum of the I-curve and the NCO-curve, the outward shift in the NCO-curve also shifts the Demand-for-Loanable-Funds out.
• This raises the interest rate r.
• The increase in r moves things up and left along the NCO-curve.
• It might seem that the outward shift in the NCO curve combined with a shift up and to the left along the NCO-curve might make the direction the quantity of NCO goes ambiguous. But not so!
• Since the I-curve does not shift, the increase in r lowers the quantity of investment I.
• Since the Supply-of-Loanable-Funds does not shift, the increase in r raises the quantity of saving S.
• S = I + NCO, since physical investment and sending funds abroad with NCO are the two possible uses of overall national saving. (Remember that national saving is household saving + corporate saving + government saving.)
• Since quantity of S increases, while the quantity of I decreases, the only way that the equation S = I + NCO can be satisfied is for the quantity of NCO to increase.
• Thus, the quantity of NCO moves in the same direction as the NCO-curve shifts.
• The quantity of NCO determines the location of the vertical Supply of Dollars. With the quantity of NCO increasing, the Supply of Dollars curve shifts to the right.
• This is actually a nice example of a negative feedback loop that is too weak to change the direction of something.
• NCO –>+  Demand for Loanable Funds –>+  r –>-  NCO