📚 Learning Guide
Real Interest Rates and Capital Flows
easy

Which of the following statements accurately describe the relationship between real interest rates and capital flows? Select all that apply.

Master this concept with our detailed explanation and step-by-step learning approach

Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
Explore Topic

Choose 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

Ready to Master More Topics?

Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.