Ceteris paribus, a decrease in the expected percentage change in the exchange rate will __________ domestic nominal U.S. return on an investment in a foreign instrument that earns the nominal foreign exchange rate?
A)decrease
B)increase
C)have no impact on

Question

Quizplus · Accepted Answer

A decrease in the expected percentage change in the exchange rate means that there is less uncertainty regarding the exchange rate. This reduces the potential gains from investing in a foreign instrument that earns the nominal foreign exchange rate. As a result, there will be a decrease in the domestic nominal U.S. return on an investment in a foreign instrument that earns the nominal foreign exchange rate.

Ceteris Paribus, a Decrease in the Expected Percentage Change in the Exchange