Question 1

If a country has higher real interest rates, what will happen to the country's currency?

Accepted Answer

The currency will appreciate

(foreign investors can get higher returns if there are higher RIRs)

Question 2

If real interest rates are higher in Japan than the US, what will happen to the FOREX and LFM graphs?

Accepted Answer

Demand will increase for the Yen because foreign investors will demand more Japanese assets

Supply of loans in the Japanese economy will increase because there is more investment in Japanese assets

Question 3

How can central banks influence net capital inflow?

Accepted Answer

Central banks can influence domestic interest rates in the short run (change RR, DR, or open market operations)

Higher IR -> higher net capital inflow

Lower IR -> lower net capital inflow

6.6 Real Interest Rates and International Capital Flows, AP Macroeconomics Flashcards