Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Capital flows to Country A, increasing its investment
B
Capital remains unchanged as investors seek stability
C
Capital flows to Country B due to lower inflation
D
Capital flows out of Country A to other regions with lower rates
Understanding the Answer
Let's break down why this is correct
Answer
When the real interest rate in Country A rises compared to Country B, it means that investors can earn more money from their investments in Country A. Higher interest rates attract foreign investors who want to take advantage of better returns. For example, if a bank in Country A offers a 5% interest rate while a bank in Country B offers only 2%, investors from Country B might move their money to Country A to earn more. This movement of money is known as capital flows, and it typically increases the amount of investment in Country A. As a result, Country A may see economic growth, while Country B could experience a decrease in investment.
Detailed Explanation
When Country A has higher real interest rates, it offers better returns for investors. Other options are incorrect because Some might think that investors prefer stability over returns; It's a common belief that lower inflation in Country B would attract capital.
Key Concepts
Real Interest Rates
Capital Flows
Inflation Rates
Topic
Real Interest Rates and Capital Flows
Difficulty
hard level question
Cognitive Level
understand
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