Question

Other things the same, an increase in the U.S. real interest rate induces
a. Americans to buy more foreign assets, which reduces U.S. net capital outflow.
b. Americans to buy more foreign assets, which increases U.S. net capital outflow.
c. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.
d. foreigners to buy more U.S. assets, which increases U.S. net capital outflow.

Answer 1

The correct answer is:

**c. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.**

Here's the reasoning: When U.S. real interest rates increase, it typically attracts foreign investors seeking higher returns on investments, which leads them to buy U.S. assets. As foreigners purchase more U.S. assets, this results in a decrease in U.S. net capital outflow, as net capital outflow is calculated as the total outflow of capital minus the total inflow of capital. Thus, higher foreign investment in U.S. assets reduces the outflow.