Other things the same, in the open-economy macroeconomic model, which of the following would make India's net capital outflow increase?
A)a decrease in U.S. interest rates
B)a decrease in Indian interest rates
C)an appreciation of the Indian rupee
D)None of the above is correct.

Question

Quizplus · Accepted Answer

A decrease in Indian interest rates would make domestic investment less attractive, causing a decrease in domestic demand for loanable funds. This would make the real interest rate in India lower relative to other countries, increasing the net capital outflow. A decrease in U.S. interest rates would increase the supply of loanable funds in the U.S., decreasing the real interest rate in the U.S. and making India's real interest rate relatively higher, decreasing the net capital outflow. An appreciation of the Indian rupee would make foreign investments relatively more expensive, also decreasing the net capital outflow. Therefore, the only option that would increase India's net capital outflow is a decrease in Indian interest rates.

Other Things the Same, in the Open-Economy Macroeconomic Model, Which