In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates,
A) there will be an inflow of foreign capital, which will cause the dollar to appreciate and net exports to decline.
B) there will be an outflow of foreign capital, which will cause the dollar to depreciate and net exports to increase.
C) there will be an inflow of foreign capital, which will cause the dollar to depreciate and net exports to increase.
D) there will be an outflow of foreign capital, which will cause the dollar to appreciate and net exports to decline.

Question

Quizplus · Accepted Answer

Higher real interest rates attract foreign capital, leading to an appreciation of the dollar, which makes exports more expensive and imports cheaper, thus reducing net exports.

In a World Where Capital Moves Rapidly Across National Boundaries