Assume that French budget deficits have raised the French prime interest rate relative to the U.S.T-bill rate.As a result, we would expect the U.S.dollar to depreciate and U.S.net exports to rise.

Question

Quizplus · Accepted Answer

When the French prime interest rate is higher than the US T-bill rate, investors will see greater returns in France than in the US, leading to an increased demand for Euros and a decreased demand for US dollars. This will cause the value of the US dollar to depreciate relative to the Euro. As a result, US exports become cheaper for French consumers, increasing US net exports.

Assume That French Budget Deficits Have Raised the French Prime