A firm produces construction equipment,some of which it sells to domestic businesses and some of which it exports.Which of the following effects of capital flight in the country where it produces would likely increase the quantity of equipment it sells?
A)both what happens to the interest rate and what happens to the exchange rate
B)what happens to the interest rate but not what happens to the exchange rate
C)what happens to the exchange rate but not what happens to the interest rate
D)neither what happens to the interest rate nor what happens to the interest rate.

Question

Quizplus · Accepted Answer

Capital flight often leads to a decrease in the demand for the domestic currency, which in turn leads to a depreciation of the domestic currency's exchange rate. This makes exports cheaper and more attractive to foreign buyers, increasing the quantity of equipment that the firm can sell overseas. Changes in the interest rate would have no immediate effect on the quantity of equipment the firm sells.

A Firm Produces Construction Equipment,some of Which It Sells to Domestic