Final answer:
When a country experiences capital flight, the interest rate rises because the supply for loanable funds shifts left, leading to an increase in the cost of borrowing.
Step-by-step explanation:
When a country experiences capital flight, it means that investors are moving their funds out of that country due to lower expected rates of return or increased economic risk. As a result, the supply of loanable funds in the country's financial market decreases because there are fewer investments coming in. This shift in supply to the left leads to an increase in the interest rate because the reduced supply of loanable funds makes them more scarce, hence more expensive (i.e., higher interest rates). The correct answer is option D: the interest rate rises because the supply for loanable funds shifts left. This depicts the relationship between the supply of loanable funds and the interest rate in the context of capital movements across borders.