In an open economy, a decrease in the perceived riskiness of domestic assets by foreigners, arising, for example, from an increase in political stability, leads to a(n) _______ in the equilibrium domestic real interest rates and to ____ in the quantity of domestic investment.
A)increase; an increase
B)increase; a decrease
C)increase; no change
D)decrease; an increase

Question

Quizplus · Accepted Answer

A decrease in the perceived riskiness of domestic assets by foreigners makes these assets more attractive, leading to an inflow of foreign capital. This increased demand for domestic assets puts downward pressure on domestic real interest rates. Lower interest rates, in turn, make borrowing cheaper, which typically leads to an increase in domestic investment.

In an Open Economy, a Decrease in the Perceived Riskiness