assets will be seen as more risky.

Step 3. Will supply increase or decrease? When the enthusiasm of foreign investors’ for investing their money in

the U.S. economy diminishes, the supply of financial capital shifts to the left. Figure 4.7 shows the supply curve
shift from S0 to S1.

FIGURE 4.7 The United States as a Global Borrower Before and After U.S. Debt Uncertainty The graph shows the

demand for financial capital and supply of financial capital into the U.S. financial markets by the foreign sector
before and after the increase in uncertainty regarding U.S. public debt. The original equilibrium (E0) occurs at an
equilibrium rate of return (R0) and the equilibrium quantity is at Q0.

Step 4. Thus, foreign investors’ diminished enthusiasm leads to a new equilibrium, E1, which occurs at the higher
interest rate, R1, and the lower quantity of financial investment, Q1. In short, U.S. borrowers will have to pay more
interest on their borrowing.
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