Assume That Capital Is Not Perfectly Mobile and Substitutable and That

Multiple Choice

Assume that capital is not perfectly mobile and substitutable and that the interest rate in the United States is currently 5%, which includes a 1% risk premium associated with continued high budget deficits. Investors expect the euro to rise against the dollar by 2% and thus demand a _____ in the _____.

A) higher return equal to 7%; United States
B) higher return equal to 7%; European Union
C) lower return equal to 3%; United States