Suppose that a U.S. dollar can earn interest of 5 percent a year in Chicago and a Canadian dollar can earn interest of 7 percent a year in Winnipeg. Will money flow from Chicago to Winnipeg?
A)Yes, because the returns on money are higher in Winnipeg.
B)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.
C)No, if investors expect that the Canadian dollar will appreciate by at least 2 percent per year.
D)No, if investors expect the U.S. dollar to appreciate by at least 2 percent per year.
E)No, as long as the U.S. dollar maintains higher purchasing power than the Canadian dollar.

Question

Quizplus · Accepted Answer

If investors expect the U.S. dollar to appreciate by at least 2 percent per year, the effective return on U.S. investments would match the 7 percent return in Winnipeg, negating the incentive to move funds.

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