If the risk of buying U.S.assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds,then
A)the real exchange rate and the interest rate will rise.
B)the real exchange rate will rise and the interest rate will fall.
C)the real exchange rate will fall and the interest rate will rise.
D)the real exchange rate and the interest rate will fall.

Question

Quizplus · Accepted Answer

If lending institutions have not carefully evaluated borrowers, it increases the risk of default, thus increasing the risk of buying U.S. assets. This will lead to a higher cost of borrowing, which will lead to a rise in the interest rate. Additionally, investors will prefer to buy assets in countries with less risk, which will lead to a fall in demand for U.S. assets and a fall in the value of the U.S. dollar. This will result in a fall in the real exchange rate. Therefore, the correct option is C: the real exchange rate will fall, and the interest rate will rise.

If the Risk of Buying U