Question
Question 48
As the real interest rate in the domestic loanable funds market increases,
(1) a trade surplus will occur.
(2) the inflationary premium will rise and the money rate of interest will decline.
(3) the net inflow of capital from abroad will increase.
(4) the cost of purchasing goods and services during the current period will decrease.
As the real interest rate in the domestic loanable funds market increases,
(1) a trade surplus will occur.
(2) the inflationary premium will rise and the money rate of interest will decline.
(3) the net inflow of capital from abroad will increase.
(4) the cost of purchasing goods and services during the current period will decrease.
Ask by Christensen Hart. in Cayman Islands
Mar 29,2025
Upstudy AI Solution
Tutor-Verified Answer
Answer
Based on the analysis, statements (1) and (3) are true, while statements (2) and (4) are false.
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Beyond the Answer
When the real interest rate in the domestic loanable funds market rises, it typically attracts foreign investment, which can lead to a net inflow of capital. This is because higher interest rates offer better returns for investors, making the domestic economy more appealing compared to others. Increased capital inflow can stimulate economic growth and potentially lead to a trade deficit if domestic goods become relatively more expensive.
Additionally, a higher real interest rate often indicates that consumers and businesses may hold off on borrowing due to the increased cost of loans, potentially leading to lower spending. This shift in behavior can affect economic activity and may eventually influence overall inflation rates depending on market conditions and consumer confidence.
