Final answer:
If foreign investors expect the Algerian government to default, interest rates would likely increase due to higher risk premiums, while net capital outflow would decrease as investors withdraw investments or invest less, reflecting investors' diminishing confidence in the Algerian economy.
Step-by-step explanation:
If foreign investors believe that the Algerian government will default on their debt, the most likely scenario is an increase in Algerian interest rates and a decrease in Algerian net capital outflow. This situation reflects option (d) of the question. The reason behind this is that increased perceived risk leads to investors demanding a higher return for the increased risk of lending to the government, hence higher interest rates. At the same time, investors may be less willing to invest in Algeria or may even withdraw their investments, resulting in decreased capital inflows to the country and thereby reducing the net capital outflow. Concern over government deficits, indications of a potentially weakening currency, and the sustainability of debt payments can lead to a lack of confidence in the economy. As a protective measure, the government might face a higher cost of financing its debt due to the increased interest rates. Moreover, rising debt levels can lead to a crowding-out effect, where government borrowing requires higher interest rates that in turn make borrowing more expensive for businesses and consumers, thus stunting economic growth.