Suppose that a U.S.dollar can earn interest of 1 percent a year in Chicago and a Canadian dollar can earn interest of 3 percent a year in Winnipeg.Will money flow from Chicago to Winnipeg?
A)No, if investors expect the U.S.dollar to appreciate by at least 2 percent per year.
B)No, as long as the U.S.dollar maintains higher purchasing power than the Canadian dollar.
C)Yes, because the returns on money are higher in Winnipeg.
D)No, because the outflow of U.S.funds would create a decrease in the U.S.dollar value, penalizing investors when they attempted to recover their funds.
E)No, if investors expect that the Canadian dollar will appreciate by at least 2 percent per year.

Question

Quizplus · Accepted Answer

If investors expect the U.S. dollar to appreciate by at least 2 percent per year, then the increase in the value of the U.S. dollar would offset the difference in interest rates between the two currencies. Therefore, money would not flow from Chicago to Winnipeg.

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