Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased capital inflows as investors seek higher returns in the country with rising rates.
B
Decreased capital inflows due to higher inflation expectations in the country compared to others.
C
Stable capital flows since interest rates do not affect overall economic growth.
D
Increased capital outflows as investors diversify their portfolios away from the country.
Understanding the Answer
Let's break down why this is correct
Answer
When a country has higher real interest rates than its trading partners, it becomes more attractive to investors. This is because they can earn more money on their investments in that country compared to others. As a result, we would expect to see an increase in capital inflows, meaning more money is coming into the country from foreign investors seeking better returns. For example, if a U. S.
Detailed Explanation
When a country raises its real interest rates, it offers better returns for investors. Other options are incorrect because Some might think higher inflation makes investors leave; It's a common belief that interest rates don't matter much.
Key Concepts
Real Interest Rates
Capital Flows
Economic Growth
Topic
Real Interest Rates and Capital Flows
Difficulty
hard level question
Cognitive Level
understand
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