Assume Canada Is a Small Open Economy with Perfect Capital

Multiple Choice

Assume Canada is a small open economy with perfect capital mobility. If the interest rate is 7 percent in Canada and 5 percent in Japan, and if the exchange rate is stable at 80 Japanese yen for one Canadian dollar, what would happen?

A) Canadian investors want to invest in Japan, and Japanese investors want to invest in Canada.
B) Both Canadian and Japanese investors want to invest in Canada.
C) Canadian investors want to invest in Canada, and Japanese investors want to invest in Japan.
D) Both Canadian and Japanese investors want to invest in Japan.