If Canadian citizens decide to purchase more foreign assets at each interest rate, which statement would best describe the effects?
A) The real interest rate increases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow decreases.
B) The real interest rate increases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow increases.
C) The real interest rate decreases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow decreases.
D) The real interest rate decreases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow increases.

Question

Quizplus · Accepted Answer

If Canadian citizens decide to purchase more foreign assets at each interest rate, this increases the demand for foreign currency and decreases the demand for Canadian dollars, causing the real exchange rate of the dollar to depreciate. As a result, Canadian net capital outflow increases as more funds flow out of Canada to purchase foreign assets. The real interest rate also increases since Canadian citizens are willing to pay higher interest rates to obtain foreign currency to purchase the foreign assets.

If Canadian Citizens Decide to Purchase More Foreign Assets at Each