Question

Suppose that interest rates in the U.S. increase relative to interest rates in Great Britain. This is matched by an equivalent depreciation of the USD against the GBP. Other things being equal:

Multiple Choice

• None of the options.

• the U.S. current account with the UK will deteriorate.

• UK investment capital will flow into the U.S.

• the UK current account with the U.S. will improve.

• UK investment capital will flow out of the U.S.

Answer 1

Since the interest rate is increases in the US with respect to the UK, there should be more depreciation in the US currency with respect to the UK. But the depreciation is equivalent which lead to capital flow from the UK to the US.

Thus the correct answer is last option: UK investment capital will flow out of the U.S