An increase in the real interest rate outside of Canada will cause net capital outflows to ________ and cause the dollar to ________ relative to other currencies.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate

Question

Quizplus · Accepted Answer

An increase in the real interest rate outside of Canada will make foreign assets relatively more attractive than domestic assets, causing Canadian investors to purchase more foreign assets and foreigners to buy fewer Canadian assets. This leads to net capital outflows from Canada to other countries and increases the supply of Canadian dollars in the foreign exchange market, causing the value of the Canadian dollar to depreciate relative to other currencies.

An Increase in the Real Interest Rate Outside of Canada