AP Macroeconomics / Open Economy—International Trade and Finance
Lesson
Interest rates, capital flows, and the accounts
Financial capital chases returns. The current and financial accounts move together.
Learning goals
- Explain why a higher real interest rate can appreciate a currency.
- Describe the current account and financial account as balancing records.
Explanation
If real rates rise at home relative to other countries, financial capital tends to flow in. Foreigners need the domestic currency to buy those assets, so the currency can appreciate. Stronger currency then weakens net exports. This is one path from tight money to weaker AD in an open economy.
The current account records trade in goods, services, and some income flows. The financial account records asset purchases. In the accounting identity they balance. A current-account deficit means the country is, on net, borrowing from abroad or selling assets—not that the books failed.
Key terms
- Capital inflow. Foreign purchases of domestic assets, which increase demand for the domestic currency.
- Current account. The record of trade in goods and services plus certain income flows with the rest of the world.
Common mistakes
- Treating a current-account deficit as automatically a crisis.
- Forgetting the exchange-rate step between interest rates and net exports.
Practice
Original Marlow Works items. Check the answer explanation after you try.
Nominal GDP rises from one year to the next while real GDP is unchanged. Which interpretation is best?
Original Marlow Works item — not a College Board question.
Take your time—this is practice, not a test.
Answer explanation
Domestic real interest rates fall relative to the rest of the world. What happens to capital flows and the currency?
Answer. Capital tends to flow out, demand for the currency falls, and the currency depreciates.
Savers look abroad for better real returns and sell the home currency to do it.
Related resources
External links with reuse status. Marlow Works is independent and does not copy restricted exam or textbook material.
Official / link only
AP Macroeconomics course page
Official six-unit framework for national income and policy models.
College Board · All rights reserved · accessed 2026-10-01
Open sourceOfficial / link only
FRED economic data
Federal Reserve economic data. Terms vary by series; do not scrape or ingest.
Federal Reserve Bank of St. Louis · Varies by series · accessed 2026-10-01
Open source