Question

When people hear that American bonds are especially appealing, in the USA net capital flows ________ and the real interest rate _______.

a)increase; rises

b)increase; falls

c)decrease; rises

d)decrease; falls

Answer 1

Increase in the demand of the American bonds will increase their prices in the market. There exist an inverse relationship between bond prices and the real interest rate. So, When demand for bond increases, real interest falls. So, option a) and c) are incorrect.

Also, the demand for bonds will lead to Capital Inflows in the US. This will increase the net capital flows to the US as people buy more bonds in return of cash. So, option d) is also incorrect.

Therefore, option b) is true.

The USA Net Capital flows increases and the real interest rate falls.