An increase in real interest rates in the United States should cause
A) real interest rates in the rest of the world to fall.
B) the value of the U.S. dollar to depreciate.
C) real interest rates in the rest of the world to climb by less than 2 percent.
D) the difference between the U.S. interest rate and interest rates in the rest of the world to shrink.
E) both b and d.

Question

Quizplus · Accepted Answer

An increase in real interest rates in the United States will make the U.S. a more attractive place to invest, which will increase the demand for the U.S. dollar and cause its value to appreciate. This will make it more expensive for foreigners to buy U.S. goods and services, which will reduce the demand for U.S. exports and cause the U.S. trade deficit to widen. In order to offset this, the Federal Reserve will need to raise interest rates in the United States, which will cause real interest rates in the rest of the world to climb by less than 2 percent.

An Increase in Real Interest Rates in the United States