Question

Initially, the real interest rates in the United States and Japan are equal to 7 percent. The real interest rate in the United States increases to 8 percent while the real interest rate in Japan decreases to 6 percent. How and why will capital flows be affected by this change in real interest rates

Answer 1

There would be a flow of capital from Japan to the United states

Step-by-step explanation:

Real interest rate is interest rate adjusted for inflation.

If the real interest rate becomes higher in the US compared to Japan, it means that investors would earn a higher return on investment if they invest in the US compared to Japan. Since the aim of most investors is to earn maximum profit, there would be a flow of capital to the US