FIGURE 6-20: A Reduction in National Saving in the Large Open Economy Panel (a) shows that a reduction in national saving lowers the supply of loanable funds. The equilibrium interest rate rises. Panel (b) shows that the higher interest rate lowers the net capital outflow. Panel (c) shows that the reduced capital outflow means a reduced supply of dollars in the market for foreign-currency exchange. The reduced supply of dollars causes the real exchange rate to appreciate and net exports to fall.