Other things being constant, if the U.S. real rate of interest exceeds that of its trading partners, we expect
A) political instability in the United States.
B) a worsening of the U.S. balance of payments.
C) an appreciation of U.S. currency.
D) that a "dirty float" will emerge.

Question

Quizplus · Accepted Answer

When the U.S. real rate of interest exceeds that of its trading partners, investors will seek to invest in the U.S. to take advantage of the higher returns. This increased demand for U.S. dollars will cause it to appreciate in value. As a result, U.S. exports become more expensive and imports become cheaper, which will worsen the U.S. balance of payments. Therefore, an appreciation of U.S. currency is expected.

Other Things Being Constant, If the U