Macro economics What would happen if there is an increase of net capital inflow

Question

Macro economics
What would happen if there is an increase of net capital inflow (surplus) into the US economy to interest rates? Please explain throughly as to why interest rates would increase, or decrease and graph. Macro economics
What would happen if there is an increase of net capital inflow (surplus) into the US economy to interest rates? Please explain throughly as to why interest rates would increase, or decrease and graph.
What would happen if there is an increase of net capital inflow (surplus) into the US economy to interest rates? Please explain throughly as to why interest rates would increase, or decrease and graph.

Explanation / Answer

An increase in the net capital inflow into the US will mean that the demand for the US dollar is high. This will cause the dollar to appreciate and hence the demand for US goods fall over time as they seem more expensive. The interest rates in the US will also rise as the demand for the US currency rises and so this causes the demand for money curve to shift rightwards and so interest rates rise. The supply of funds over time would rise and so adjust the interest rates downwards, but in the initial term the inflow of funds will cause the demand for money to rise and so the interest rates rise as well.

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