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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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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