Please help with my review: 1. Capital outflows occur if: Select one: a. domesti

ID: 1198308 • Letter: P

Question

Please help with my review:

1. Capital outflows occur if:

Select one:

a. domestic interest rates are higher than foreign interest rates.

b. domestic interest rates are lower than foreign interest rates.

c. domestic and foreign interest rates are the same.

d. none of the above.

2. In the foreign exchange market, foreign residents wishing to purchase U.S. exports or U.S. real and financial assets must:

Select one:

a. demand U.S. dollars by supplying their foreign currency.

b. demand U.S. dollars by supplying U.S. dollars.

c. supply U.S. dollars by demanding their foreign currency.

d. none of the above.

Answer B : domestic interest rates are lower than foreign interest rates.

Logic: When Domestic Interest Rates are lower, the increase in foreign interest rate leads to capital outflow.

Answer: a. demand U.S. dollars by supplying their foreign currency.

When foreign residents buy U.S. goods or services or assets they must purchase dollars.

Total expenditures by foreign residents for U.S. things = demand for dollars = Supply of foreign currency in exchange markets.

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