How do changes in real interest rates affect portfolio investment decisions and exchange rates in the context of varying inflation rates?

Changes in real interest rates can significantly influence portfolio investment decisions and exchange rates, especially when inflation rates vary. When real interest rates rise, it often means that investors can earn more from their investments, making the country more attractive to foreign capital. For example, if a country increases its real interest rates while keeping inflation low, investors from other countries may move their money there to take advantage of higher returns. This influx of capital can lead to an appreciation of the country's currency, as demand for it increases. Conversely, if real interest rates fall, investors may seek higher returns elsewhere, potentially leading to a depreciation of the currency as capital flows out.