Author Question: Explain how net capital flows are related to net foreign investment, net foreign direct investment, ... (Read 179 times)

mydiamond · **on:** Jun 29, 2018

Explain how net capital flows are related to net foreign investment, net foreign direct investment, and net foreign portfolio investment.

What will be an ideal response?

Question 2

After an unexpected ________ in the price of oil, the long-run adjustment decreases the price level and ________ the unemployment rate as they return to their original levels.

A) increase; increases B) increase; decreases
C) decrease; decreases D) decrease; increases

karlss · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Net capital flows measure the difference between capital inflows and capital outflows. Capital inflows increase when assets flow into the United States from other countries. Capital outflows increase when assets flow from the United States into other countries. Net foreign investment is equal to net foreign direct investment (U.S. investment in facilities in other countries minus foreign investment in U.S. facilities) plus net foreign portfolio investment (U.S. investment in foreign stocks or bonds minus foreign investment in U.S. stocks or bonds). An increase in net foreign direct investment or an increase in foreign portfolio investment will result in an equal decrease in net capital flows. In other words, net capital flows will be equal to the negative of net foreign investment.

Answer to Question 2

B