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 United States will ____, and the 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, it becomes more attractive for Japanese investors to keep their funds in Japan, as they can earn higher returns. This reduces the supply of loanable funds provided by Japanese investors to the United States, leading to an increase in U.S. interest rates. Therefore, the correct choice is (D) decrease in supply of loanable funds and an increase in U.S. interest rates.

When Japanese Interest Rates Rise, and If Exchange Rate Expectations