Final answer:
The equilibrium interest rate in the foreign investment framework is determined by the intersection of the supply and demand curves for financial investment. When foreign investors become less enthusiastic, the equilibrium interest rate increases and the quantity of financial investment decreases.
Step-by-step explanation:
The equilibrium interest rate in the foreign investment framework is located at the new equilibrium point, E₁, where the supply and demand for financial investment meet. This equilibrium is determined by the intersection of the supply curve, which represents the willingness of foreign investors to provide funds, and the demand curve, which represents the willingness of U.S. borrowers to borrow funds.
When foreign investors become less enthusiastic about investing in the U.S., the supply curve shifts to the left, indicating that there is less financial investment available at every interest rate. As a result, the new equilibrium interest rate, R₁, is higher, and the quantity of financial investment, Q₁, is lower. This means that U.S. borrowers will have to pay more interest on their borrowing.