Question

A country's overall level of interest rates should have an impact on the financial account of the BOP. Relatively low real interest rates should normally stimulate an outflow of capital seeking higher interest rates in other country currencies. a. Trueb. False

Answer 1

Answer: a. True

Explanation: Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country's currency. Foreign investment involves capital flows from one country to another, granting extensive ownership stakes in domestic companies and assets. Foreign investment denotes that foreigners have an active role in management as a part of their investment. One major spur of this inflow and outflow is the existing interest rate a country offers. Higher interest rates increases inflow of capital. The opposite is true for countries with lower interest rates, as there is an outflow of capital to countries having higher interest rates.