Suppose that real interest rates in the U.S. rise relative to real interest rates in other countries. This increase would make foreigners
A)more willing to purchase U.S.bonds, so U.S.net capital outflow would fall.
B)more willing to purchase U.S.bonds, so U.S.net capital outflow would rise.
C)less willing to purchase U.S.bonds, so U.S.net capital outflow would fall.
D)less willing to purchase U.S.bonds, so U.S.net capital outflow would rise.

Question

Quizplus · Accepted Answer

When real interest rates in the U.S. rise relative to those in other countries, U.S. bonds become more attractive to foreigners because they can earn a higher return on these investments. This increased demand for U.S. bonds by foreigners means that more foreign capital is flowing into the U.S., which reduces the U.S. net capital outflow. Net capital outflow is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. When foreigners buy more U.S. bonds, they are increasing their purchase of U.S. assets, which decreases the net capital outflow.

Suppose That Real Interest Rates in the U