Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Higher real interest rates typically attract capital flows into the country.
B
Lower real interest rates typically attract capital flows out of the country.
C
Real interest rates have no impact on capital flows.
D
Capital flows are determined solely by foreign exchange rates.
Understanding the Answer
Let's break down why this is correct
Answer
Real interest rates are the rates of return on investments after adjusting for inflation. When real interest rates are high, they attract foreign investors who want to earn more on their savings, leading to increased capital inflows into the economy. For example, if a country offers a real interest rate of 5%, investors from other countries may move their money there to take advantage of better returns compared to their own countries. Conversely, if real interest rates are low, capital may flow out of the economy as investors seek higher returns elsewhere. This relationship shows how changes in interest rates can influence where money is invested globally, affecting economic growth and stability.
Detailed Explanation
When real interest rates are high, investors want to put their money in that country. Other options are incorrect because This answer suggests that low interest rates push money out; This option says interest rates don't matter for capital flows.
Key Concepts
Real interest rate
Topic
Real Interest Rates and Capital Flows
Difficulty
easy level question
Cognitive Level
understand
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