September 08, 2011

An appreciation of the real exchange rate means that every unit of non traded goods now acquires more internationally traded goods than before. This implies that the real rate of return of domestically located assets increases relative to the rest of the world, and so will domestic asset values. In an attempt to arbitrage the higher rates, investors will flock to the U.S. The U.S. will experience an inflow of capital as a result of the increased rate of return.

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