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- Subject
- Exchange-Rate Determinationeconomics-mcqs › exchange-rate-determination
- Published
- 1 Jun 2019
- Last updated
- 28 May 2026
Given that the annual interest rate on U.S. government bonds is 12% with an inflation rate of 8%, and in Japan the interest rate on government bonds is 10% with an inflation rate of 5%, which direction will investment capital most likely move, and what will be the impact on the U.S. dollar?
Multiple choice question for Exchange-Rate Determination. Select an option, then review the explanation below.
Explanation
When comparing real interest rates (nominal interest rate minus inflation), Japan offers a higher real return (10% - 5% = 5%) compared to the U.S. (12% - 8% = 4%). This encourages investors to move funds from the U.S. to Japan, which increases demand for Japanese assets and causes the U.S. dollar to depreciate.
More Exchange-Rate Determination MCQs
Practice related questions from the same subject.
- 1.If a Big Mac costs $3 in the United States and 2 pesos in Mexico, what is the implied purchasing power parity (PPP) exchange rate between the peso and the US dollar?
- 2.If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?
- 3.If interest rates are the same on similar assets in the U.S. and abroad, and investors expect the U.S. dollar to weaken relative to foreign currencies in the future, where are investment funds most likely to move?
- 4.If a country's money demand equals its money supply and its balance of payments is initially balanced, which of the following changes would cause the balance of payments to shift into a surplus?
- 5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?