Can someone please clarify how keeping domestic interest rates low doesn’t prevent foreign capital inflows? My understanding is that that if I am living in the United States and interest rates are high, than foreign investors would be more interested in buying US government treasuries as interest rates are high and potential returns are attractive. One though that comes to mind is a country like Japan. If interest rates are so low that they are negative, wouldn’t that prevent foreign capital inflow because why would an investor want negative real return as opposed to a higher rate?
What makes you think that it doesn’t?
I’m pretty sure that it does.
“Which of the following objectives would a national government most likely pursue by placing restrictions on inflows on foreign capital?”
A) Protecting domestic industries
B) Supporting domestic asset prices
C) Keeping domestic interest rates low
Answer: A. In the explanation, “a government seeking to keep domestic interest rates low would more likely to restrict capital outflows”.
Uh, isn’t it inflows we are talking about here?
No; it’s outflows.
The low interest rates will reduce the inflows. The government wants to keep rates low, so it has to restrict outflows or else there will be no domestic investing.
Yes, so I’m still not quite understanding. Answer C is stating that by keeping domestic interest rates low, foreign investment inflows will be reduced (and they will be reduced), which seems to be an answer to the question does it not?
That’s not what answer C is stating.
Answer C is stating that for the government to be able to keep interest rates low, they have to prevent capital outflows as well (as a separate action from lowering interest rates).