The equilibrium interest rate will ________ if foreign real income increases and the sensitivity of investment to the interest rate decreases.

Question

Quizplus · Accepted Answer

An increase in foreign real income would typically lead to an increase in demand for domestic exports, thereby increasing the demand for domestic currency and pushing up the interest rate. Additionally, a decrease in the sensitivity of investment to the interest rate means that changes in the interest rate have a lesser impact on investment levels, potentially allowing interest rates to rise without a significant drop in investment. Together, these factors suggest an increase in the equilibrium interest rate.

The Equilibrium Interest Rate Will ________ If Foreign Real Income