Question

When the U.S. real interest rate falls, purchasing U.S. assets becomes:

a. more attractive to U.S. residents and less attractive to foreign residents.
b. less attractive to U.S. residents and more attractive to foreign residents.
c. less attractive to both U.S. residents and foreign residents.
d. more attractive to both U.S. and foreign residents.

Answer 1

c. less attractive to both U.S. residents and foreign residents.

Step-by-step explanation:

When the real interest rate falls, purchasing assets in that country becomes less attractive for all the investor whether US residents or foreigners. This is because the returns or profit fall with decrease in interest rates. This not only decreases investor interest or investment in the banking sector but it also decreases investment in other sectors as well because a number of sectors adjust their rate of returns on investments. Hence, the U.S. net capital outflow will rise as investment will go abroad as interest rates decrease will have an affect on other returns as well. Therefore purchasing US assets will be less attractive to both U.S. residents and foreign residents.