Question

Assume that the current unemployment rate

15. If the rcal capital should flow (A) into the United States and the dollar will depreciate (B) into the United States and the dollar will appreciate (C) out of the United States and the dollar will depreciate (D) out of the United States and the dollar will appreciate (E) out of the United States and the value of the dollar will not change the United States increases relative to that of the rest of the world, ou ㄣ

Answer 1

If the real interest rate in United States increases relative to that of the rest of the world, then the investors from rest of the world will have an incentive to invest in the financial assets of United States. This will create an inflow into the capital account of United States. Now, in order to invest in the financial assets of United States, the investors from rest of the world will have to purchase the currency of United States (dollars). This will increase the demand for the dollars and in turn will cause the value of dollar to appreciate.

So we can conclude that there will be a capital flow in the United States and the currency of United States will appreciate. So, option B is the correct answer.