Other things the same, if the Swedish real interest rate were to decrease, Swedish net capital outflow
A)and net capital outflow of other countries would rise.
B)and net capital outflow of other countries would fall.
C)would rise, while net capital outflow of other countries would fall.
D)would fall, while net capital outflow of other countries would rise.

Question

Quizplus · Accepted Answer

According to the interest rate parity theory, a decrease in the real interest rate in Sweden would reduce the returns on investments in Swedish assets compared to other countries, leading to a decrease in the demand for Swedish assets and a consequent increase in the supply of Swedish currency in the foreign exchange market. This increase in the supply of Swedish currency would lead to a depreciation of the currency, making foreign assets more expensive for Swedish investors and reducing their net capital outflow. On the other hand, the decrease in Swedish real interest rates would make other countries' assets relatively more attractive, leading to an increase in their net capital outflow. Therefore, Swedish net capital outflow would fall while net capital outflow of other countries would rise.

Other Things the Same, If the Swedish Real Interest Rate