Assume That Capital Is Perfectly Mobile and Substitutable and That

Multiple Choice

Assume that capital is perfectly mobile and substitutable and that the interest rate in the United States and the European Union is currently 5%. Investors expect the euro to rise against the dollar by 2% and they 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