Question

If domestic real interest rates decrease, then net capital outflow ___________. If foreign real interest rates decrease, then net capital outflow ___________.

increases, decreases

increases, increases

decreases, increases

decreases, decreases

Answer 1

answer :increases, decreases

Net out flow of capital= inflow of capital- outflaow of capital

when domestic (country A) real interest rate decreases, investors of domestic country will not invest in domestic country instead they invest in foreign country (country B). And foreign investors will not invest in domestic country as real interst rate is low now.

Thus net capital outflow increases.

when foreign (country B) real interest rate decreases, domestic investors will not invest in foreign country (country B), instead they invest in domestic country(COUNTRY A). similarly foreign investors will not invest in their country (country B) instead they invest in domestic country (Country A). As a result capital outflow from domesti country decreases. Investors always invest where interest rates or returns are high,