Question

Consider two large open​ economies, the home economy and the foreign economy. Which of the following lowers the world real interest rate ​(rʷ)?

A. Increased domestic savings in the home economy.
B. A decrease in foreign investment in the foreign economy.
C. A decrease in the trade deficit in the home economy.
D. A rise in inflation rates in both economies.

Answer 1

A decrease in foreign investment in the foreign economy lowers the world real interest rate.

Step-by-step explanation:

According to the information provided, a decrease in foreign investment in the foreign economy lowers the world real interest rate. This is because a decrease in foreign investment reduces the demand for domestic financial capital, which in turn lowers the domestic interest rate. A lower interest rate attracts less foreign financial capital, leading to a decrease in the world real interest rate.