Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Lowering real interest rates attracts FDI by reducing the cost of borrowing.
B
Increasing real interest rates decreases FDI due to higher borrowing costs.
C
Both A and B are correct.
D
FDI is unaffected by real interest rates.
Understanding the Answer
Let's break down why this is correct
Answer
A country's monetary policy affects real interest rates, which can influence foreign direct investment (FDI). When a central bank lowers interest rates, borrowing money becomes cheaper. This encourages businesses, both local and foreign, to invest because they can finance their projects at a lower cost. For example, if a country reduces its interest rate, a foreign company might decide to build a factory there, expecting to earn more profit due to lower expenses. Conversely, if interest rates are high, it can deter FDI since it becomes more expensive for businesses to borrow money and invest.
Detailed Explanation
Both lowering and increasing real interest rates affect FDI. Other options are incorrect because This option suggests only lowering rates attracts FDI; This option implies that only higher rates decrease FDI.
Key Concepts
Foreign direct investment (FDI)
Monetary policy
Topic
Real Interest Rates and Capital Flows
Difficulty
medium level question
Cognitive Level
understand
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