ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Capital inflows in the Financial Account and currency appreciation
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Capital outflows in the Financial Account and currency appreciation
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Capital inflows in the Current Account and currency appreciation
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Capital outflows in the Current Account and currency depreciation
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Detailed explanation-1: -Higher interest rates can increase a currency’s value. They can attract more overseas investment, which means more money coming into a country and higher demand for the currency.
Detailed explanation-2: -If interest rates are allowed to increase, the capital inflow will rise further; even if they are held constant, there will be no market incentive to reduce the inflow. Financing such inflows can be expensive.
Detailed explanation-3: -Capital inflows generate higher demand for both tradables and nontradables and lead to a higher relative price of nontradables and to appreciation of the real exchange rate. This is necessary so that domestic resources will be diverted to production of nontradables to meet the increased demand.
Detailed explanation-4: -The lower the interest rate, the greater the amount of capital that firms will want to acquire and hold, since lower interest rates translate into more capital with positive net present values. The desire for more capital means, in turn, a desire for more loanable funds.