Suppose that short-term interest rates rise in the United States and, consequently, U.K.Financial investors respond by sending funds to the United States (and cover those funds Against any exchange rate change that might occur between the time of the investment And the time of returning the funds and interest to the United Kingdom). In this situation,
Which one of the following events will NOT occur?
A) a rise in short-term eurodollar interest rates in London
B) a fall in the dollar price of the British pound in the spot market
C) a fall in the pound price of the U.S. dollar in the forward market
D) a fall in short-term interest rates on pound deposits in London

Question

Quizplus · Accepted Answer

In this situation, short-term interest rates on pound deposits in London are likely to fall, as investors move their funds to the United States in search of higher returns. Therefore, D is the correct answer as it describes the expected outcome in this scenario. A, B, and C are all likely to occur as a result of investors shifting funds to the United States, as demand for dollars increases and supply of pounds decreases, leading to lower pound-USD exchange rates in both the spot and forward markets, and higher interest rates on dollar deposits in London.

Suppose That Short-Term Interest Rates Rise in the United States