True or False?
False! An exogenous capital movement into a country would, other things being unchanged, lead to an increase in its real exchange rate. This increase would be necessary to shift demand off domestic goods to make room for the additional investment expenditure and create an increase in imports over exports equal to the capital inflow. But an observed rise in the real exchange rate could occur for any number of reasons---we cannot conclude that it is necessarily the result of a greater net capital inflow. It could be caused by any exogenous shift in world demand for domestic relative to foreign goods, or by a faster rate of technological change in the domestic economy that increased domestic relative to foreign wages, causing the cost of domestic non-traded domestic goods to rise relative to foreign goods as predicted by the Balassa-Samuelson hypothesis. Or the real exchange rate increase could have resulted from any of a host of other factors.