Other things unchanging, a higher U.S. real interest rate

Question

a. increases U.S. net capital outflow because U.S. residents and foreigners prefer to invest in the United States.
b. decreases U.S. net capital outflow because U.S. residents and foreigners prefer to invest in the United States.
c. decreases U.S. net capital outflow because U.S. residents and foreigners prefer to invest abroad.
d. none of the above.

Answer 1

In this context, when U.S. real interest rates increase, it generally leads to greater returns on investments in the U.S. This tends to attract both U.S. residents and foreign investors to invest domestically rather than abroad. Consequently, the increase in investment within the U.S. would decrease U.S. net capital outflow (the amount of investments leaving the U.S. to invest abroad).

Thus, the correct answer is:

b. decreases U.S. net capital outflow because U.S. residents and foreigners prefer to invest in the United States.