Suppose the interest rate in England is 5% and the interest rate in France is 7%. If the euro, France's currency, is expected to depreciate by 3% against the British pound
A) the euro-pound exchange rate will change as people will invest in other countries, such as the United States.
B) there will be no flow of funds from England to France because of the exchange rate uncertainty.
C) funds will flow from England to France.
D) funds will flow from France to England.

Question

Quizplus · Accepted Answer

Due to higher interest rates in France, funds will flow from England to France. However, the expected depreciation of the euro against the pound will make it less attractive for investors to hold euros. Therefore, funds will flow from France to England as investors convert their euros into pounds to take advantage of the higher interest rate and to avoid potential losses from depreciation.

Suppose the Interest Rate in England Is 5% and the Interest