Which statement best predicts the effects of an increase in a country's real interest rate?
A) Its net capital outflow and the real exchange rate increase.
B) Its net capital outflow and the real exchange rate decrease.
C) Its net capital outflow increases, and the real exchange rate decreases.
D) Its net capital outflow decreases, and the real exchange rate increases.

Question

Quizplus · Accepted Answer

An increase in a country's real interest rate makes it a more attractive place for saving, leading to an inflow of capital from abroad. This increases the demand for the country's currency, appreciating the real exchange rate, and decreases net capital outflow as more foreign investors invest in the country.

Which Statement Best Predicts the Effects of an Increase in a Country's