Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Higher real interest rates in a country tend to attract foreign capital.
B
Lower real interest rates make a country's assets less appealing to investors.
C
Capital flows are solely determined by the nominal interest rates of a country.
D
Changes in real interest rates can influence exchange rates, affecting international investment.
E
Investors are indifferent to real interest rates when considering capital flows.
Understanding the Answer
Let's break down why this is correct
Answer
Real interest rates are the rates of interest that have been adjusted for inflation, and they play a significant role in capital flows, which refer to the movement of money for investment or trade. When real interest rates are high in a country, it usually attracts foreign investors because they can earn more on their investments compared to other places with lower rates. For example, if the real interest rate in Country A is 5% while in Country B it is only 2%, investors from Country B may choose to invest in Country A to take advantage of the higher returns. Conversely, if real interest rates are low, it can lead to capital outflows, as investors seek better returns elsewhere. Thus, the relationship between real interest rates and capital flows is important for understanding how money moves in and out of different economies.
Detailed Explanation
None of the statements accurately describe how real interest rates affect capital flows. Other options are incorrect because This suggests that high real interest rates attract money from other countries; This implies that low real interest rates make investments less attractive.
Key Concepts
Real Interest Rates
Capital Flows
Exchange Rates
Topic
Real Interest Rates and Capital Flows
Difficulty
easy level question
Cognitive Level
understand
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