Chapter 41, Problem 6MCQ

To determine

The correct option for the given situation in the graph.

Answer to Problem 6MCQ

Option a is correct.

Explanation of Solution

Explanation for the correct option:

a.

In the given figure, the interest rate in the country U is higher than in country B. In the country U, capital inflow will increase as investors would be more attracted to invest in this country due to the higher interest rate. Therefore, option a is correct.

Explanation for incorrect options:

b.

Capital inflow will decrease in country B as its interest rate is only 2%. Therefore, option b is incorrect.

c.

Exports to country B will also reduce as its own products will be less expensive. Therefore, option c is the incorrect answer.

d.

In country U, imports will remain unchanged if interest rates are increased. Therefore, option d is incorrect.

e.

Capital outflow will decrease due to higher interest rate people would prefer investing in their own country. Therefore, option e is incorrect.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.