When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the UnitedStates will ____, and U.S. interest rates will ____.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question

Quizplus · Accepted Answer

When Japanese interest rates rise, the supply of loanable funds provided by Japanese investors to the United States will decrease because investors will prefer lending in their own country where they can obtain higher interest rates. This decrease in the supply of loanable funds will lead to an increase in U.S. interest rates. Hence, option D is correct.

When Japanese Interest Rates Rise, and If Exchange Rate Expectations