If real interest rates were to increase in foreign countries

If real interest rates were to increase in foreign countries while remaining fixed in the United States, all else equal, net capital outflow must:

A) increase

B)remain unchanged

C) none of the above

D) fall

Solution

As per Macroeconomic Theory of the open economy, when the U.S. real interest rate rises, purchases of foreign assets by domestic residents fall and purchases of U.S. assets by foreigners rise. Thus, net capital outflow is inversely related to the real interest rate.

Hence, in the given question, net capital outflow must d.) Fall