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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 8% with an inflation rate of 4%, and Switzerland's government bonds offer a 10% interest rate with a 7% inflation rate, in which direction will investment capital most likely move?
Multiple choice question for Exchange-Rate Determination. Select an option, then review the explanation below.
Explanation
Because the real interest rate (nominal interest minus inflation) is higher in the U.S. (4%) compared to Switzerland (3%), investors are inclined to transfer funds from Switzerland to the U.S. This capital flow causes the Swiss franc to depreciate relative to the dollar.
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?