AP Macroeconomics Flashcards: Real Interest Rates and International Capital Flows
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 10 cards to help you master important concepts.
How does a capital inflow affect a country's currency in the foreign exchange market?
To invest in a country, foreigners must first buy its currency, so a capital inflow increases the demand for that country's currency, causing it to appreciate.
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How does a capital inflow affect a country's currency in the foreign exchange market?
To invest in a country, foreigners must first buy its currency, so a capital inflow increases the demand for that country's currency, causing it to appreciate.
What is the relationship between a central bank's actions and net capital inflows?
Central banks can influence the domestic interest rate in the short run, which in turn will affect net capital inflows by making domestic assets more or less attractive.
A central bank implements a policy that significantly lowers the domestic real interest rate. What is the likely short-run impact on capital flows?
Lowering the domestic interest rate will likely cause a net capital outflow, as financial capital moves to other countries seeking relatively higher returns.
If Country A's real interest rate rises above Country B's, what happens to the flow of financial capital?
Financial capital will flow out of Country B and into Country A, a phenomenon known as capital inflow for Country A.
Why do investors compare real interest rates rather than nominal interest rates when moving capital between countries?
Real interest rates account for inflation, providing a more accurate measure of the real return on an asset, which is the primary concern for international investors.
How does a capital inflow affect a country's loanable funds market?
A financial capital inflow increases the supply of funds available for lending in the domestic loanable funds market.
How does a relatively higher real interest rate in a country affect financial capital flows?
Financial capital will flow toward the country with the relatively higher real interest rate as investors seek higher returns on their assets.
Define an open economy in the context of capital flows.
An open economy is one where differences in real interest rates across countries can change the relative values of domestic and foreign assets, leading to international financial capital flows.
In an open economy, what is the primary effect of differences in real interest rates across countries?
Differences in real interest rates across countries affect financial capital flows, foreign exchange markets, and loanable funds markets by changing the relative values of domestic and foreign assets.
What is net capital inflow?
Net capital inflow is the net amount of financial capital flowing into a country, which is heavily influenced by the country's domestic interest rate relative to others.