How might an increase in foreign capital inflows impact domestic interest rates and the level of private investment in a country experiencing high government borrowing?

When a country receives more foreign capital, the money that can be lent out grows, which tends to lower domestic interest rates because lenders have more funds to offer. Lower interest rates make borrowing cheaper for businesses, encouraging them to invest in new projects. However, if the government is also borrowing heavily, the extra foreign money may first be used to finance that borrowing, which can keep interest rates from falling as much as they otherwise might. Still, the overall effect is usually a drop in rates that lifts private investment, especially when the government’s borrowing does not dominate the money supply. For example, if a country receives a large foreign investment and its government debt rises, the new money can reduce rates, allowing a factory to borrow cheaply and expand production.