Question 19

Higher real interest rates in Country X cause capital to flow in.

Higher real interest rates in Country X attract capital from investors seeking higher returns on their investments. This influx occurs because higher interest rates provide better yields compared to other countries with lower rates.

A) flow out

This option is incorrect because higher real interest rates typically incentivize rather than deter investment. When the rates are elevated, investors are more likely to invest capital in the country rather than withdraw it.

B) flow in

This option is correct as it directly reflects the behavior of capital in response to higher real interest rates. Investors are drawn to the potential for increased returns, leading to a net inflow of capital into Country X.

C) no flow

This option is incorrect because the presence of higher real interest rates generally stimulates capital movement. A scenario with no capital flow would imply a lack of investment interest, which contradicts the expected economic behavior under such conditions.

D) reverse

This option is also incorrect. The term "reverse" suggests that capital would flow out in response to higher interest rates, which is not the typical behavior observed. Instead, higher rates generally encourage capital inflow rather than reversal.

Conclusion

In summary, the correct answer is that higher real interest rates in Country X cause capital to flow in, as this aligns with standard economic principles regarding investment behavior. All other options fail to recognize the relationship between interest rates and capital movement, which typically favors inflows in the context of higher returns.