When fear of default on bonds issued by U.S.corporations decline,then
A)net capital outflow and the exchange rate both rise.
B)net capital outflow rises and the exchange rate falls.
C)net capital outflow falls and the exchange rate rises.
D)net capital outflow and the exchange rate both fall.

Question

Quizplus · Accepted Answer

When fear of default on bonds issued by U.S. corporations decline, investors are more willing to invest in these bonds, leading to an increase in demand for the bonds and an increase in their price. This leads to a decrease in the yield on the bonds, making them less attractive to foreign investors. As a result, net capital outflow falls, as foreign investors sell their U.S. bonds and invest their capital elsewhere. This decrease in net capital outflow leads to an increase in the demand for U.S. dollars, causing the exchange rate to rise.

When Fear of Default on Bonds Issued by U