For the United States suppose the annual interest rate on government securities equals 8 percent while the annual inflation rate equals 4 percent, For Switzerland the annual interest rate on government securities equal 10 percent while the annual inflation rate equals 7 percent the above variables would cause investment funds to flow from ?
Correct answer: C. Switzerland to the United States causing the franc to depreciate
- A. the United States to Switzerland causing the dollar to depreciate
- B. the United States to Switzerland causing the dollar to appreciate
- C. Switzerland to the United States causing the franc to depreciate
- D. Switzerland to the United States causing the franc to appreciate
Explanation
The relevant real return is approximately the nominal interest rate minus inflation: 4% in the United States versus 3% in Switzerland. Funds therefore move from Switzerland to the United States, causing the franc to depreciate.
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