Assume a system of floating exchange rates and high capital mobility.In response to relatively high interest rates abroad, suppose domestic investors place their funds in foreign capital markets.Other things equal, the result would be
A) a depreciation of the domestic currency and a rise in net exports.
B) a depreciation of the domestic currency and a fall in net exports.
C) an appreciation of the domestic currency and a rise in net exports.
D) an appreciation of the domestic currency and a fall in net exports.

Question

Quizplus · Accepted Answer

With high interest rates abroad, domestic investors will invest in foreign markets, leading to an outflow of domestic currency to buy foreign currency, causing the domestic currency to depreciate. A weaker domestic currency makes exports cheaper and imports more expensive, thus increasing net exports.

Assume a System of Floating Exchange Rates and High Capital