In the absence of international capital flows, the equilibrium interest rate in the U.S. market for loanable funds is 3%, while in Germany it is 7%. International borrowing and lending between the United States and Germany may result in a common interest rate of _____ and _____.

Question

Quizplus · Accepted Answer

In the absence of international capital flows, the equilibrium interest rates in the U.S. and Germany are 3% and 7%, respectively. When international capital flows occur, the interest rates tend to equalize. Therefore, since Germany has a higher interest rate, it will attract capital inflows from the United States. Consequently, the capital outflows from the United States will lead to a decrease in the interest rate in the U.S. market for loanable funds, while the capital inflows to Germany will increase its interest rate. As a result, a common interest rate of around 4% is likely to emerge with capital outflows from the United States matching the capital inflows to Germany.

In the Absence of International Capital Flows, the Equilibrium Interest