ECONOMICS
TRADE EXCHANGE AND INTERDEPENDENCE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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exports and aggregate demand will increase while price level falls
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exports increase while AD and PL falls
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All three increase
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exports and aggregate demand decreases while PL rises
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Detailed explanation-1: -Lower interest rates will reduce speculative demand for assets and therefore reduce demand for a currency. When interest rates are low, foreign investors will be put off from investing – which will ultimately weaken a country’s currency value. If interest rates are high, then it is likely that the opposite will happen.
Detailed explanation-2: -If the Fed were to decrease the interest rate in the U.S., it would cause the amount of net capital inflows to decline. The loanable funds model that accounts for an open economy provides insight into international capital flows by analyzing these movements in terms of supply and demand for funds.
Detailed explanation-3: -How do real interest rates affect capital flow? When a country has high real interest rates, it will experience capital inflows. On the other hand, when a country has low real interest rate, it will experience capital outflows.
Detailed explanation-4: -When there are differences in real interest rates between two countries that allow for the flow of financial capital, that capital flows to the country with the relatively higher real interest rate and out of the country with the relatively lower real interest rate.