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Back to Unit 6 Cheat Sheet

Real Interest Rates and International Capital Flows

AP Macro - 6.6

Higher real interest rates in a country attract foreign capital (capital inflows), increasing demand for that country's currency and causing it to appreciate. Lower real interest rates cause capital outflows and currency depreciation. Capital flows link interest rates, exchange rates, and net exports.

Ultimate Flashcard Review

Video

Shifters in the Foreign Exchange Market

Key Concepts to Understand

Question 1 of 3

Which of the following might lead to an increase in demand for the British Pound?

An increase in the British money supply
An increase in British income taxes
An increase in British real interest rates relative to other countries
An economic recession in Britain

Practice Questions: Test Your Understanding

Apply what you've learned with these practice questions. These questions test your understanding of the key concepts.

Question 1 of 3

If the U.S. Federal Reserve pursues expansionary monetary policy, leading to lower real interest rates in the U.S. compared to other countries, what is the likely impact on international capital flows and the value of the U.S. dollar?

Capital inflows increase; Dollar appreciates
Capital outflows increase; Dollar depreciates
Capital inflows decrease; Dollar appreciates
Capital outflows decrease; Dollar depreciates
No significant impact on capital flows or the dollar

Key Takeaways

  • 📊
    Master the fundamentals: Understanding these core concepts is essential for success in AP Economics.
  • ✅
    Practice makes perfect: Use the interactive exercises and practice questions to reinforce your understanding.