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Real Interest Rates and Capital Flows
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A country experiences a rise in its real interest rates due to an increase in its central bank's policy rate. How might this change affect capital flows and investment patterns in the global economy?

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Choose the Best Answer

A

Higher real interest rates will attract foreign investment, leading to increased capital inflows into the country.

B

Higher real interest rates will discourage foreign investment, leading to decreased capital inflows into the country.

C

Higher real interest rates will have no effect on capital flows, as investors are more concerned with political stability.

D

Higher real interest rates will lead to a depreciation of the country's currency, thus attracting more capital.

Understanding the Answer

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Answer

When a country's central bank raises its policy rate, it leads to higher real interest rates. This means that investors can earn more on their savings and investments in that country compared to others with lower rates. As a result, foreign investors may be attracted to invest in that country, increasing capital flows into it. For example, if the United States raises its interest rates, investors from around the world might buy U. S.

Detailed Explanation

When real interest rates go up, it means investors can earn more money from their investments. Other options are incorrect because Some might think higher interest rates scare away investors; This answer suggests that political stability is more important than interest rates.

Key Concepts

Real Interest Rates
Capital Flows
Exchange Rates
Topic

Real Interest Rates and Capital Flows

Difficulty

medium level question

Cognitive Level

understand

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