If increased borrowing by the government drives up the real interest rate in the United States, then: A) the U.S. dollar will depreciate in the foreign exchange market. B) U.S. investors will increase their investment abroad. C) U.S. exports will expand relative to imports. D) an inflow of loanable funds from abroad will occur.
D, you can observe the opposite case right now right?
here’s what I was thinking…real interest rates goes up–> Cccy appreciates : does this not promotes investment abroad??
D also
D?
You all are correct! (D) but couldn’t make the choice between B and D. Any explanation why D over B?
if interest rates are higher here than abroad, why would you want to invest abroad? you make more $$ here. obviously that’s simplified, but i think that’s the concept. you put your money where real interest rates are the highest in our little simple econ world.
thanks bannisja agreed, from this simplification, I guess D is better choice.
don’t confuse the fact that once it appreciates US currency has more buying power with investment opportunities.
D is the only option consistent with appreciation of domestic currency