6.6 Real Interest Rates and International Capital Flows

In an open economy, differences in real interest rates across countries change the relative values of domestic and foreign assets. Financial capital will flow ____the country with the relatively higher interest rate.

• toward

• away from

Answer explanation

If you can get a higher interest rate, you are willing to supply your money to the country where you earn the biggest profit, assuming they aren't going to default.

Central banks can influence the domestic interest rate in the short run, which in turn will affect ______.

• net capital inflows

• my grade

• the directional path of the next hurricane

National Savings in a closed economy includes

• private sector savings

• public sector savings

• net capital inflows

National Savings in an open economy includes

• private sector savings

• public sector savings

• net capital inflows

Changes in relative real interest rates result in changes in capital inflows and capital outflows which ultimately results in interest rate parity among different countries. What is parity?

• When you eventually get the same interest rate with all currencies

• When the interest rates are different but settle in at a reasonable difference.

Answer explanation

This is why money leaves the US to go to China. They have a higher interest rate.

An increase in the domestic real interest rate _____ capital inflows or savings from abroad

• attracts

• repels

A decrease in the domestic real interest rate provides an incentive for capital outflows to occur as domestic savers seek _____ rates of return on financial assets abroad

• higher

• lower