Other things the same,an increase in the interest rate would tend to reduce
A)domestic investment, but not net capital outflow.
B)net capital outflow, but not domestic investment.
C)both domestic investment and net capital outflow.
D)neither domestic investment nor not capital outflow.

Question

Quizplus · Accepted Answer

An increase in the interest rate tends to decrease the demand for domestic investment, lowering the quantity of investment, as borrowing funds for capital projects becomes more expensive. The increase in interest rates also attracts foreign investors, increasing the demand for the domestic currency, and hence the exchange rate. The rise in exchange rates reduces net capital outflows as domestic goods become more costly relative to foreign products, thereby reducing exports of domestic products and raising imports of foreign items, resulting in a decrease in net capital outflow. Therefore, both domestic investment and net capital outflow are reduced when there is an increase in the interest rate.

Other Things the Same,an Increase in the Interest Rate Would