AP Macroeconomics AMSCO Guided Notes
6.6: Real Interest Rates and International Capital Flows
AP Macroeconomics Guided Notes
AMSCO 6.6 - Real Interest Rates and International Capital Flows
Essential Questions
- How do differences in the real interest rate affect capital flows, foreign exchange markets, and loanable funds markets?
A. Real Interest Rates
1. What is the difference between nominal and real interest rates, and why is the real rate more important for investors?
2. How do you calculate the real interest rate, and what does a negative real rate mean for borrowers and lenders?
3. How do differences in real interest rates between countries affect where investors choose to place their capital?
B. International Capital Flows
1. What are international capital flows and how do they relate to a country's balance of payments?
1. Capital Inflow
1. What is capital inflow and how do higher real interest rates in a country attract foreign investment?
2. What are the positive effects of capital inflow on a country's money supply, loanable funds, and currency value?
3. How does capital inflow affect aggregate demand, prices, and unemployment in the short run?
4. What is the trade-off associated with capital inflow, and how does it affect the current account and net exports?
2. Capital Outflow
1. What is capital outflow and why do investors move money out of countries with lower real interest rates?
2. How does capital outflow affect a country's money supply, loanable funds, currency value, and GDP?
3. What happens to aggregate demand, price levels, and employment when capital outflows occur?
4. How can currency depreciation from capital outflow benefit a country's exports and current account?
C. The Central Bank's Role
1. What are the key responsibilities of a central bank in managing the economy and influencing capital flows?
2. How do changes in real interest rates set by the central bank affect international capital flows?
3. Why is central bank reputation important for attracting foreign investment?
Key Terms
nominal interest rate
real interest rate
open economy
international capital flows
capital inflow
capital outflow