April 17, 2008

What happens when Interest Rates Change

Posted in AP Exam, Test Info at 4:55 pm by davidprudente

Here’s the written explanation for the Capital Flow Table:

Scenario I: Increasing Interest Rates.

As Interest Rates rise in the United States, Capital Flows In to the country because the higher interest rates are an incentive for foreign capital. As capital flow in to the nation, the Demand for the Dollar Increases, as demand for the dollar increases, the Value of the Dollar Appreciates. When the dollar appreciates, goods made in the United States appear more costly to domestic and foreign consumers. Therefore, Imports Increase while Exports Decrease.

Scenario II: Decreasing Interest Rates.

As Interest Rates fall in the United States, Capital Flows Out of the country because the lower interest rates are a disincentive for foreign and domestic capital. As capital flow out of the nation, the Demand for the Dollar Decreases, as demand for the dollar decreases, the Value of the Dollar Depreciates. When the dollar depreciates, goods made in the United States appear less expensive to domestic and foreign consumers. Therefore, Imports Decrease while Exports Increase.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: