All Flashcards
What are capital flows?
The movement of money across borders for investment, trade, or production.
Define inbound capital flow.
Foreign investors purchase domestic assets.
Define outbound capital flow.
Domestic investors purchase foreign assets.
What drives capital flows?
The search for higher returns.
What happens when foreign investors purchase domestic assets?
Increases demand for the domestic currency and increases the supply of loanable funds.
What happens when domestic investors purchase foreign assets?
Increases demand for the foreign currency and decreases the supply of loanable funds at home.
What is the effect of high real interest rates on capital flow?
Attract inbound capital flow.
What is the effect of low real interest rates on capital flow?
Lead to outbound capital flow.
What is the impact of capital flows on the supply of loanable funds?
Capital flows can shift the supply of loanable funds.
What is the impact of capital flows on the demand for a currency?
Capital flows can shift the demand for a currency.
How does higher real interest rates in the US affect Japanese investors?
Attracts them to buy US Treasury bonds for better returns.
How do lower real interest rates in the US affect American investors?
Pushes them to seek higher returns abroad, like buying German bonds.
How does a significant outflow of capital affect the domestic loanable funds market?
Decreases the supply of loanable funds.
How does a higher real interest rate in the US compared to Canada affect capital flow?
Leads to an inflow of capital from Canada to the United States.
What happens to the value of the U.S. dollar relative to the euro if the real interest rate in the U.S. is higher?
The U.S. dollar will appreciate relative to the euro.
How does the appreciation of the U.S. dollar affect U.S. net exports?
Net exports of the United States will decrease.
How does an increase in demand for a country's currency affect its exports?
An increase in demand for a country's currency makes its exports more expensive.
How does an increase in demand for a country's currency affect its imports?
An increase in demand for a country's currency makes its imports cheaper.
If interest rates are higher in Japan than in the U.S., what do American investors do?
American investors want to buy Japanese assets.
If interest rates are higher in Japan than in the U.S., what happens to demand for the Japanese Yen?
They increase their demand for the Japanese Yen to do so.
What is the impact of a higher real interest rate on capital inflows?
Increases capital inflows.
What is the impact of a lower real interest rate on capital outflows?
Increases capital outflows.
What is the impact of capital inflows on the value of a country's currency?
Appreciates the currency.
What is the impact of capital outflows on the value of a country's currency?
Depreciates the currency.
How does a higher real interest rate affect investment in the long run?
A higher real interest rate does not affect long-run aggregate supply (LRAS).
What is the impact of an appreciated currency on a country's exports?
Decreases exports.
What is the impact of an appreciated currency on a country's imports?
Increases imports.
How does a real interest rate increase affect the supply of loanable funds?
Increases the supply of loanable funds.
How does a real interest rate decrease affect the supply of loanable funds?
Decreases the supply of loanable funds.
What is the impact of a decrease in net exports on aggregate demand?
Decreases aggregate demand.