Which of the following is not a determinant of capital flows?

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BlackTom AI · Accepted Answer

Question restatement: Which of the following is not a determinant of capital flows?

Option a: Relative interest rates between countries. This is a classic determinant. Capital tends to move toward higher returns, so differences in interest rates influence cross-border capital movements.

Option b: Businesses investing in foreign countries as an attempt to market their products. This reflects outward foreign direct investment motivated by market access and growth opportunities, which is a determinant of capital flows.

Option c: None of the other answers is correct. This option asserts that all the other choices are determinants, implying that there is no option that is not a determinant. If the other options are indeed determinants, then this statement would be correct as a meta-answer indicating that none of the other options are incorrect determinants.

Option d: Investors' desire for diversification. Diversification motive encourages capital to move across borders to spread risk, a recognized determinant of capital flows.

Option e: Investors' desire to direct funds towards international banking centers. Attractiveness of financial hubs and centers for funding and liquidity is a known determinant influencing capital allocation across borders.

Analysis across options:
- Option a is consistent with standard financial theory: capital flows respond to interest rate differentials, affecting expected returns.
- Option b aligns with the idea that firms seek cheaper financing, larger markets, or strategic advantages abroad, driving cross-border investment.
- Option d captures diversification as a key motivator behind moving funds internationally to reduce portfolio risk.
- Option e reflects the practical pull of international banking centers that offer liquidity, services, and financial infrastructure, guiding capital towards those locations.
- Option c logically follows if all the other options are valid determinants; it is the meta-choice indicating that there is no incorrect determinant among the listed items.

Common pitfalls addressed:
- If one argued that diversification cannot influence capital flows, that would be a misconception; diversification is widely accepted as a determinant.
- If one claimed that only interest rates matter, that would ignore non-rate motives like diversification and financial center effects.

In sum, since options a, b, d, and e describe recognized determinants of capital flows, option c correctly states that none of the other answers is incorrect, i.e., all the listed items besides c are determinants.

Which of the following is not a determinant of capital flows?

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Which of the following is not a determinant of capital flows?

View Explanation

Log in for full answers

Similar Questions

Suppose that the interest rate is 4% in the United States and 7% in Japan. Assuming financial assets in the two countries carry equal risk:

The French interest rate is lower than the international market rate, and the Italian interest rate is higher than the international interest rate. Capital will flow from ______________ to _______________ if it can cross international boundaries.

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Making Your Study Simpler

The French interest rate is lower than the international market rate, and the Italian interest rate is higher than the international interest rate. Capital will flow from to _ if it can cross international boundaries.

If the real interest rate in country A is higher than the real interest rate in country B, capital will flow into country _, causing the real interest rate in country A to __.