📚 Learning Guide
Real Interest Rates and Capital Flows
medium

If higher real interest rates in Country A attract capital flows similar to how a magnet attracts metal filings, then lower real interest rates in Country B would likely result in what?

Master this concept with our detailed explanation and step-by-step learning approach

Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
Explore Topic

Choose the Best Answer

A

A decrease in capital flows to Country B

B

An increase in capital flows to Country B

C

A stabilization of capital flows in Country B

D

A shift in capital flows from Country A to Country B

Understanding the Answer

Let's break down why this is correct

Answer

If higher real interest rates in Country A attract capital flows like a magnet, this suggests that investors are looking for better returns on their money. When Country B has lower real interest rates, it becomes less appealing for investors because they can earn less on their investments there. As a result, capital may flow out of Country B, as investors seek higher returns elsewhere, just like how metal filings would move away from a weak magnet. For example, if an investor can earn 5% interest in Country A but only 2% in Country B, they are likely to move their money to Country A to maximize their earnings. This movement can lead to decreased investment in Country B, affecting its economy negatively.

Detailed Explanation

Lower real interest rates in Country B make it less attractive for investors. Other options are incorrect because Some might think lower rates attract more money; It's easy to think that low rates keep things steady.

Key Concepts

Real Interest Rates
Capital Flows
Investment Patterns
Topic

Real Interest Rates and Capital Flows

Difficulty

medium level question

Cognitive Level

understand

Ready to Master More Topics?

Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.