Explain how differences in real interest rates redirect financial capital, change currency demand and exchange rates, and affect net capital inflows.
Assume that the economy of Barrikos is in short-run equilibrium, with its economic data
summarized in the table provided. The government budget is balanced, and the capital and
financial account (CFA) balance is zero.
Barrikos has an open economy and a flexible exchange rate. Based solely on the change in
the real interest rate in Barrikos shown on your graph in part D (iii), will Barrikos' capital
and financial account (CFA) balance move into surplus, move into deficit, or remain the
same? Explain.