Real Interest Rates and International Capital Flows

Question 1

If the real interest rate is 5 percent in the United States and 8 percent in Canada, what will happen over time to the current and financial/capital accounts in the United States?

AThe financial/capital account will have a deficit, and the current account will remain constant.

BThe financial/capital account will remain constant, and the current account will have a surplus.

CThe financial/capital account will have a surplus, and the current account will have a deficit.

DThe financial/capital account will have a deficit, and the current account will have a surplus.

ENeither the current nor the financial/capital account will change.

Question 2

A central bank seeking to appreciate its currency could do which of the following?

AIncrease interest rates

BImpose a tariff

CInvest in another country's currency

DBuy another country's government bonds

ERaise income taxes

Question 3

Which of the following could cause a country's real interest rate to increase and its currency to appreciate?

ADeficit spending

BAn increase in taxes

CA decrease in business investment in capital equipment

DA decrease in spending

EA decrease in consumer spending

Question 4

Use the graph of the U.S. economy to answer the question that follows.

\fO Interest rates Financial capital inflows U.S. dollar value Increase Increase Appreciates O Interest rates Financial capital inflows U.S. dollar value Increase Decrease Depreciates O Interest rates Financial capital inflows U.S. dollar value No change Decrease Appreciates Interest rates Financial capital inflows U.S. dollar value Decrease No change Appreciates O Interest rates Financial capital inflows U.S. dollar value Decrease Increase Depreciates