If Canadian citizens decide to purchase more foreign assets at each interest rate, which of the following best describes the effects?
A)The real interest rate increases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow decreases.
B)The real interest rate increases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow increases.
C)The real interest rate decreases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow decreases.
D)The real interest rate decreases, the real exchange rate of the dollar appreciates, and Canadian net capital outflow increases.

Question

Quizplus · Accepted Answer

If Canadian citizens decide to purchase more foreign assets, then the demand for Canadian dollars will decrease, leading to a depreciation of the real exchange rate. This will make foreign assets relatively more expensive, causing Canadian net capital outflow to increase. However, to offset the increased demand for foreign assets, the real interest rate will need to increase, making Canadian assets more attractive to foreign investors. Therefore, the real interest rate increases, the real exchange rate of the dollar depreciates, and Canadian net capital outflow increases.

If Canadian Citizens Decide to Purchase More Foreign Assets at Each