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Given that the annual interest rate on U.S. government bonds is 12% with an inflation rate of 8%, and in Japan the interest rate on government bonds is 10% with an inflation rate of 5%, which direction will investment capital most likely move, and what will be the impact on the U.S. dollar?

Exchange-Rate Determination MCQs for PPSC, FPSC, NTS, and Pakistan government job tests. Select an option below, then read the explanation.

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Subject
Exchange-Rate Determinationeconomics-mcqs › exchange-rate-determination
Published
1 Jun 2019
Last updated
28 May 2026

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Explanation

When comparing real interest rates (nominal interest rate minus inflation), Japan offers a higher real return (10% - 5% = 5%) compared to the U.S. (12% - 8% = 4%). This encourages investors to move funds from the U.S. to Japan, which increases demand for Japanese assets and causes the U.S. dollar to depreciate.

More Exchange-Rate Determination MCQs

Practice related questions from the same subject.

  1. 1.If a Big Mac costs $3 in the United States and 2 pesos in Mexico, what is the implied purchasing power parity (PPP) exchange rate between the peso and the US dollar?
  2. 2.If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?
  3. 3.If interest rates are the same on similar assets in the U.S. and abroad, and investors expect the U.S. dollar to weaken relative to foreign currencies in the future, where are investment funds most likely to move?
  4. 4.If a country's money demand equals its money supply and its balance of payments is initially balanced, which of the following changes would cause the balance of payments to shift into a surplus?
  5. 5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?
  6. 6.In a floating exchange rate system, what effect would a decline in income in the United States have on the demand for imports and foreign currency?
  7. 7.What happens to Japanese exports if Japan experiences a current account deficit while its currency exchange rates are determined by the market?
  8. 8.Imagine a world where only Canada and Switzerland exist. If there is a surplus of Swiss francs available in the foreign exchange market, what does this indicate about the current account balances?
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