International flows of financial capital in response to interest rate changes in Canada:
A)weaken domestic monetary policy through an offsetting net export effect.
B)strengthen domestic monetary policy through a supporting net export effect.
C)strengthen domestic fiscal policy through an offsetting net export effect.
D)weaken domestic monetary policy through an offsetting real wealth effect.

Question

Quizplus · Accepted Answer

When interest rates rise in Canada, it becomes more attractive for foreign investors to invest in Canadian financial assets, such as bonds and stocks, in order to obtain the higher return. This results in an inflow of foreign capital, which strengthens the Canadian dollar and reduces the cost of imports. This in turn increases the competitiveness of Canadian exports, making them more attractive to foreign buyers. As a result, exports increase, which supports economic growth and employment. Therefore, the net export effect supports domestic monetary policy.

International Flows of Financial Capital in Response to Interest Rate