Asked by Jessie Kindley on Jun 16, 2024
Verified
Suppose that real interest rates in the U.S. rise relative to real interest rates in other countries. This increase would make foreigners
A) more willing to purchase U.S.bonds, so U.S.net capital outflow would fall.
B) more willing to purchase U.S.bonds, so U.S.net capital outflow would rise.
C) less willing to purchase U.S.bonds, so U.S.net capital outflow would fall.
D) less willing to purchase U.S.bonds, so U.S.net capital outflow would rise.
Real Interest Rates
The interest rate adjusted for inflation, representing the true cost of borrowing and the real yield to an investor.
Net Capital Outflow
The difference between a country's total exports of capital and total imports of capital over a certain period, indicating how much capital is flowing out of the country in comparison to what is coming in.
U.S. Bonds
Debt securities issued by the United States Department of the Treasury to finance government spending as an alternative to taxation.
- Evaluate the effects of changes in real interest rates on international capital flows and exchange rates.
Verified Answer
SA
Safia AfrozJun 21, 2024
Final Answer :
A
Explanation :
When real interest rates in the U.S. rise relative to those in other countries, U.S. bonds become more attractive to foreigners because they can earn a higher return on these investments. This increased demand for U.S. bonds by foreigners means that more foreign capital is flowing into the U.S., which reduces the U.S. net capital outflow. Net capital outflow is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. When foreigners buy more U.S. bonds, they are increasing their purchase of U.S. assets, which decreases the net capital outflow.
Learning Objectives
- Evaluate the effects of changes in real interest rates on international capital flows and exchange rates.