Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Capital will flow into Country A seeking higher returns.
B
Capital will flow out of Country A to seek lower interest rates.
C
There will be no change in capital flows between the countries.
D
Capital will equally distribute between Country A and Country B.
Understanding the Answer
Let's break down why this is correct
Answer
When the real interest rate in Country A increases compared to Country B, it generally attracts more foreign investment into Country A. Investors are always looking for the best returns on their money, and higher interest rates mean they can earn more from their investments in Country A. For example, if a bank in Country A offers a 5% interest rate while a bank in Country B offers only 2%, investors will likely move their money to Country A to take advantage of the higher return. This movement of money is known as capital flow, and it can strengthen Country A's economy as more funds are available for businesses and government projects. Overall, higher real interest rates in one country can lead to increased capital inflows, benefiting that country's financial system.
Detailed Explanation
When interest rates go up in Country A, investors want to put their money there. Other options are incorrect because Some might think that higher rates push money away; It's a common mistake to think nothing changes.
Key Concepts
Real Interest Rates
Capital Flows
Investment Patterns
Topic
Real Interest Rates and Capital Flows
Difficulty
easy level question
Cognitive Level
understand
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