How does an increase in the inflation rate typically affect real interest rates and consequently influence capital flows in an economy?

When the inflation rate goes up, it usually leads to a decrease in real interest rates. Real interest rates are calculated by subtracting the inflation rate from nominal interest rates, which are the rates you see in banks. For example, if the nominal interest rate is 5% and inflation rises to 3%, the real interest rate is only 2%. Lower real interest rates can make saving money less attractive because the returns do not keep up with rising prices. As a result, investors may move their money to other countries with higher real interest rates, influencing capital flows and possibly leading to less investment in the local economy.