Assume a system of floating exchange rates and high capital mobility.In response to relatively high domestic interest rates, suppose that foreign investors place their funds in domestic capital markets.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

When foreign investors place their funds in domestic capital markets, they demand domestic currency to invest in those markets. This increase in demand for domestic currency will lead to an appreciation of the domestic currency. As a result, the prices of domestic goods will increase relative to foreign goods, and this will lead to a fall in net exports. Hence, the correct answer is D.

Assume a System of Floating Exchange Rates and High Capital