Need help with this question, thanks in advance. Which of the following is the effect of...
Need help with this question, thanks in advance.
Which of the following is the effect of a decrease in the world interest rate?
a. Foreigners buy more Canadian assets, which increases Canadian net capital outflow.
b. Foreigners buy more Canadian assets, which reduces Canadian net capital outflow.
c. Canadians buy more foreign assets, which reduces Canadian net capital outflow.
d.Canadians buy more foreign assets, which increases Canadian net capital outflow.
Homework Answers
Ans. b) Foreigners buy more Canadian assets, which reduces Candian net capital outflow.
Since interest rate in Canada is higher than the world interest rate, there is greater incentive for foreigners to invest in Canadian assets and hence this purchase increases. Thus, there is an increase in net capital inflows and Canadians would not want to invest in the world market since the world gives lower interest rate as compared to their own country.
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