If a country repeals an investment tax credit that,subsidizes domestic investment,
A)net capital outflow and the real exchange rate rise.
B)net capital outflow rises and the real exchange rate falls.
C)net capital outflow falls and the real exchange rate rises.
D)net capital outflow and the real exchange rate fall.

Question

Quizplus · Accepted Answer

Repealing an investment tax credit that subsidizes domestic investment would lower the incentive for foreigners to invest capital in that country, causing a decrease in net capital outflow. A decrease in net capital outflow would lead to a decrease in the demand for the country's currency, causing a fall in the real exchange rate. Therefore, Choice B is the correct answer.

If a Country Repeals an Investment Tax Credit That,subsidizes Domestic