Question

Suppose that real interest rates in the U.S. rise relative to real interest rates in other countries. This increase would make foreigners?

1) Invest more in the U.S.
2) Invest less in the U.S.
3) Not change their investment behavior
4) Cannot be determined

Answer 1

When real interest rates in the U.S. rise relative to other countries, foreigners would invest less in the U.S.

Step-by-step explanation:

When the real interest rates in the U.S. rise relative to real interest rates in other countries, it would make foreigners invest less in the U.S.

As interest rates in the U.S. increase, financial investments in the U.S. promise a higher return compared to other countries. This leads to more investors demanding U.S. dollars to buy interest-bearing assets, while fewer investors are willing to supply U.S. dollars to foreign exchange markets. The demand for the U.S. dollar decreases, causing the nation's currency to depreciate or weaken.

Therefore, when real interest rates rise in the U.S., foreigners would typically invest less in the U.S.