Other things the same,a decrease in the real interest rate raises the quantity of
A)domestic investment and net capital outflow.
B)domestic investment but not net capital outflow.
C)net capital outflow but not domestic investment.
D)neither domestic investment nor net capital outflow.

Question

Quizplus · Accepted Answer

A decrease in the real interest rate makes domestic investment relatively more attractive compared to investing in foreign countries. This leads to an increase in domestic investment. Additionally, a decrease in the real interest rate decreases the return on domestic assets, making foreign assets relatively more attractive. This leads to an increase in net capital outflow, as capital flows out of the domestic market and into foreign markets seeking higher returns. Therefore, a decrease in the real interest rate raises the quantity of both domestic investment and net capital outflow.

Other Things the Same,a Decrease in the Real Interest Rate