Question

International flows of funds can affect the Fed's monetary policy. For example, suppose that interest rates are trending lower than the Fed desires. If this downward pressure on U.S. interest rates may be offset by ____ of foreign funds, the Fed may not feel compelled to use a ____ monetary policy.

Answer 1

Answer:

International flows of funds can affect the Fed's monetary policy. For example, suppose that interest rates are trending lower than the Fed desires. If this downward pressure on U.S. interest rates may be offset by outflows of foreign funds, the Fed may not feel compelled to use a tight monetary policy.

Explanation:

A Tight Monetary Policy is when the central bank tightens policy or makes money tight by raising short-term interest rates through policy changes to the discount rate, also known as the federal funds rate. Boosting interest rates increases the cost of borrowing and effectively reduces its attractiveness.

Outflows of foreign funds or the flight of assets occurs when foreign and domestic investors sell off their holdings in a particular country because of perceived weakness in the nation's economy and the belief that better opportunities exist abroad.

The reasoning is as follows, the rate is down in the USA so holders of assets look for better rates abroad as a consequence  there is less money in the US domestic economy and automatically the rate tend to rise (remember that interest rate is the price of money). If there is less supply of something the price of that something will go up (ceteris paribus). The same thing will happen to the interest rate without the intervention of the FED.