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Real Interest Rates and Capital Flows
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What effect does an increase in real interest rates typically have on capital flows into a country?

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Choose the Best Answer

A

It decreases capital flows due to higher borrowing costs.

B

It has no effect on capital flows.

C

It increases capital flows as higher returns attract foreign investment.

D

It leads to capital flight out of the country.

Understanding the Answer

Let's break down why this is correct

Answer

When real interest rates in a country increase, it often attracts more capital from foreign investors. This happens because higher rates mean that investors can earn more money from their investments, such as bonds or savings accounts, in that country. For example, if a U. S. investor sees that interest rates in Brazil have risen significantly, they might decide to invest their money there to take advantage of the higher returns.

Detailed Explanation

When real interest rates go up, investors can earn more money on their investments. Other options are incorrect because Some might think higher interest rates mean borrowing is too expensive; It's a common belief that interest rates don't affect investment flows.

Key Concepts

Capital flows
Topic

Real Interest Rates and Capital Flows

Difficulty

easy level question

Cognitive Level

understand

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