Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to______ and should place ____ pressure on U.S. interest rates.
A)decrease; upward
B)decrease; downward
C)increase; downward
D)increase; upward

Question

Quizplus · Accepted Answer

When foreign investors decrease their holdings of U.S. securities, they are essentially pulling their capital out of the U.S. financial markets. This reduces the overall supply of loanable funds in the United States. With less supply of loanable funds, the price of borrowing those funds, which is the interest rate, tends to increase. Therefore, there is upward pressure on U.S. interest rates.

Assume That Foreign Investors Who Have Invested in U