Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Capital will flow into the country with higher real interest rates.
B
Capital will flow out of the country with higher real interest rates.
C
There will be no change in capital flows regardless of interest rates.
D
Capital flows will remain the same as interest rates do not affect investments.
Understanding the Answer
Let's break down why this is correct
Answer
When a country's real interest rates rise significantly compared to another country, it usually attracts more capital from investors. This happens because higher interest rates offer better returns on savings and investments, making it more appealing for people to put their money there. For example, if Country A has a real interest rate of 5% while Country B has only 2%, investors from Country B might move their money to Country A to earn more. As a result, we see an increase in capital inflows to Country A, which can strengthen its economy. Overall, the difference in interest rates creates an incentive for investors to seek higher returns in the country with the better rates.
Detailed Explanation
When real interest rates go up, it means people can earn more money on their savings. Other options are incorrect because Some might think higher interest rates push money away; This option suggests that interest rates don't matter for money movement.
Key Concepts
Real Interest Rates
Capital Flows
International Finance
Topic
Real Interest Rates and Capital Flows
Difficulty
easy level question
Cognitive Level
understand
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