Assume a system of floating exchange rates.In response to relatively high interest rates abroad,suppose domestic investors place their funds in foreign capital markets.The result would be
A) a depreciation of the domestic currency and a rise in net exports
B) a depreciation of the domestic currency and a fall in net exports
C) an appreciation of the domestic currency and a rise in net exports
D) an appreciation of the domestic currency and a fall in net exports

Question

Quizplus · Accepted Answer

When domestic investors place funds in foreign markets due to higher interest rates abroad, the demand for foreign currency increases, leading to a depreciation of the domestic currency. This makes domestic goods cheaper for foreign buyers, increasing net exports.

Assume a System of Floating Exchange Rates