Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose 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
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