If a country experiences a tremendous increase in the demand for loanable funds as many new infrastructure building projects are initiated, then the interest rate will
A)rise, there will be a decrease in net capital outflow, and the real exchange rate will fall.
B)rise, there will be a decrease in net capital outflow, and the real exchange rate will rise.
C)fall, there will be an increase in net capital outflow, and the real exchange rate will rise.
D)fall, there will be an increase in net capital outflow, and the real exchange rate will fall.

Question

Quizplus · Accepted Answer

When there is an increase in demand for loanable funds, the interest rate will rise as borrowers compete for available funds. This will lead to a decrease in net capital outflow as domestic investors will find domestic bonds more attractive due to higher interest rates. A decrease in net capital outflow will lead to an increase in the demand for domestic currency, which will cause the real exchange rate to rise.

If a Country Experiences a Tremendous Increase in the Demand