If U.S.firms decide to invest more domestically at each interest rate,the real interest rate in the United States
A)decreases, the real exchange rate of the dollar depreciates, and U.S.net capital outflow decreases.
B)decreases, the real exchange rate of the dollar appreciates, and U.S.net capital outflow increases.
C)increases, the real exchange rate of the dollar appreciates, and U.S.net capital outflow decreases.
D)increases, the real exchange rate of the dollar depreciates, and U.S.net capital outflow increases.

Question

Quizplus · Accepted Answer

When U.S. firms invest more domestically, the demand for loanable funds increases, and interest rates rise. The higher interest rates attract foreign investment, which increases the demand for dollars and appreciates the exchange rate of the U.S. dollar. However, the increase in domestic investment also reduces the demand for foreign loanable funds, leading to a decrease in U.S. net capital outflow. The increase in the interest rate, appreciation of the dollar, and decrease in net capital outflow are all likely to lead to a decrease in the level of investment in foreign countries. Therefore, the correct answer is C.

If USFirms Decide to Invest More Domestically at Each Interest Rate,the