For the United States suppose the annual interest rate on government securities equals 12 percent while the annual inflation rate equals 8 percent For Japan the annual interest rate on government securities equals 10 percent while the annual inflation rate equals 5 percent the above variables would cause investment funds to flow from ?
Correct answer: A. The United States to Japan causing the dollar to depreciate
- A. The United States to Japan causing the dollar to depreciate
- B. The United States to Japan causing the dollar to appreciate
- C. The Japan to United States, causing the dollar to depreciate
- D. The Japan to United States, causing the dollar to appreciate
Explanation
The real interest rate is about 4% in the United States versus 5% in Japan, so investment funds are attracted to Japan. Selling dollars to buy yen increases dollar supply and causes the dollar to depreciate.
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