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In Business / High School | 2025-07-08

Capital inflows have what effect on interest rates? Options: - lower - raise - hold steady - positive - neutral

Asked by emmagrace9983

Answer (1)

Capital inflows refer to the movement of money for the purpose of investment into a country from foreign sources. These inflows can come in various forms such as foreign direct investment, portfolio investment, or loans from other countries.
When there is an increase in capital inflows, it means more money is entering the financial system of the country. This generally affects interest rates. Here's how:

Increased Supply of Money : With more money coming into the country, the supply of money in the financial market increases.

Lower Interest Rates : Banks and financial institutions, having more money to lend due to increased supply, can lower the interest rates to encourage borrowing and investment. Hence, capital inflows generally lead to lower interest rates.

Economic Impact : Lower interest rates can boost economic activity by making it cheaper for businesses and consumers to borrow money for investments and purchases. This can lead to economic growth and can have a positive impact overall.


Thus, the effect of capital inflows on interest rates can typically be described as 'lower'. Therefore, the correct option is 'lower'.

Answered by JessicaJessy | 2025-07-22

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