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Hot Money Flows

Capital flows moving to countries with higher interest rates and changes in exchange rates. For instance if the interest rates of a country rise higher relative to that of other countries, investors will implace their money in the financial sector of that country to maximise the return on their investment. These flows occur very quickly and will also cause the exchange rate to strengthen too. If the interest rates cut capital would flow out of the economy and cause the domestic currency to weaken.

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