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Question & Answer
Choose the Best Answer
Foreign capital inflows could lower domestic interest rates, encouraging more private investment.
Foreign capital inflows would raise domestic interest rates, further crowding out private investment.
Foreign capital inflows have no effect on domestic interest rates or private investment.
Foreign capital inflows would lead to a decrease in government borrowing.
Understanding the Answer
Let's break down why this is correct
When foreign capital arrives, banks have more money to lend. Other options are incorrect because Many think more foreign money raises rates, but it actually adds to the money supply; Some assume foreign inflows have no effect, but they enlarge the loanable pool.
Key Concepts
Loanable Funds Market Analysis
medium level question
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Deep Dive: Loanable Funds Market Analysis
Master the fundamentals
Definition
Loanable Funds Market Analysis involves examining how changes in demand for loans impact real interest rates in response to shifts in investor optimism or pessimism about future business conditions. By analyzing graphs and understanding the relationship between loan demand and interest rates, economists can predict market reactions to economic uncertainties.
Topic Definition
Loanable Funds Market Analysis involves examining how changes in demand for loans impact real interest rates in response to shifts in investor optimism or pessimism about future business conditions. By analyzing graphs and understanding the relationship between loan demand and interest rates, economists can predict market reactions to economic uncertainties.
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