Suppose that foreign investors are worried about the political stability of Acadia. How would that fear...
Suppose that foreign investors are worried about the political stability of Acadia. How would that fear affect the real interest rate and the real exchange rate?
Homework Answers
If foreign investors lose confidence on Acadian political stability, they will invest less in Acadia. Since inbound FDI will fall in Acadia, domestic real interest rate will decrease.
Also, lower inbound FDI will decrease the demand for Acadia's domestic currency, so its domestic currency will lose value and depreciate. As a result, real exchange rate will decrease.
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