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Capital Flows and Currency Value
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How do interest rates generally affect capital flows and the value of a currency?

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Choose the Best Answer

A

Higher interest rates attract foreign capital and increase currency value

B

Higher interest rates repel foreign capital and decrease currency value

C

Lower interest rates attract foreign capital and decrease currency value

D

Interest rates have no impact on capital flows or currency value

Understanding the Answer

Let's break down why this is correct

Answer

Interest rates play a crucial role in determining where money flows in the global economy and how much a currency is worth. When a country has higher interest rates, it often attracts foreign investors looking for better returns on their investments. This influx of capital increases demand for that country's currency, leading to an appreciation in its value. For example, if the United States raises its interest rates, investors from other countries may convert their money into U. S.

Detailed Explanation

When interest rates are high, they offer better returns on investments. Other options are incorrect because Some might think high interest rates scare away investors; It's a common mistake to think lower interest rates attract money.

Key Concepts

interest rates
Topic

Capital Flows and Currency Value

Difficulty

easy level question

Cognitive Level

understand

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