In the open-economy macroeconomic model, which of the following correctly represents the market for loanable funds identity?

• A. S = I - NCO
• B. S = I + NCO
• C. S = I + NX
• D. S = I

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the components of the loanable funds market in an open economy. Here, S represents national saving, I is domestic investment, NCO is net capital outflow, and NX is net exports.
2. Step 2: Recall the identity that links saving, investment, and net capital outflow in an open economy. The key relationship is that national saving finances both domestic investment and net capital outflow.
3. Step 3: Write the loanable funds market identity as an equation: \(S = I + NCO\). This means that saving equals domestic investment plus net capital outflow.
4. Step 4: Recognize that net capital outflow (NCO) measures the net purchase of foreign assets by domestic residents, which complements domestic investment in the use of national saving.
5. Step 5: Note that the other options either misplace the signs or confuse net exports (NX) with net capital outflow (NCO), so the correct identity for the loanable funds market in an open economy is \(S = I + NCO\).