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APMac U6 L5 Video Real Interest Rates and International Capital Flows

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APMac U6 L5 real interest rates and international capital flows 

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The Blurry Frontiers of Economic Policy | by Michael Spence

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Economic policies are set at the national level, where officials seek to benefit the domestic economy. But these policies are increasingly affecting other economies and the global system, giving rise to what might be called "policy externalities" - consequences that extend outside policymakers' target environment.

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1. Can you explain how expansionary monetary policy affect the money market, the loanable funds market, and from there how it affects international capital flow?

2. What effect does inflation have on capital flows (in general)? Why?

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Explain (using graphs as appropriate) how differences in real interest rates across countries affect financial capital flows, foreign exchange markets, and loanable funds markets.

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The interaction of buyers and sellers exchanging the currency of one country for the currency of another determines the equilibrium exchange rate in a flexible exchange market and influences the flow of goods, services, and financial capital between countries.

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There is no Quizlet for this lesson.

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In an open economy, differences in real interest rates across countries change the relative values of domestic and foreign assets. Financial capital will flow toward the country with the relatively higher interest rate.

Central banks can influence the domestic interest rate in the short run, which in turn will affect net capital inflows.