Question

If you are indifferent between investing​ $1,000 for one year in a U.S. Treasury security that has an interest rate of​ 5% or in a Canadian government security that has an interest rate of​ 8%, you must be expecting
A. the U.S. dollar to appreciate against the Canadian dollar by​ 3% during the year.
B. the U.S. dollar to depreciate against the Canadian dollar by​ 3% during the year.
C. productivity growth in Canada to be greater than productivity growth in the United States during the year.
D. the inflation rate in the United States will be higher than the inflation rate in Canada during the year.

Answer 1

Answer:

The correct answer is option A.

Explanation:

A person is indifferent between investing $1,000 in a US treasury security that has an interest rate of 5% or on Canadian government security that has an interest rate of 8%.  

If the person is indifferent it means that the person is expecting the same profit from both the alternatives. But the interest rate is higher in the case of Canadian security. The difference between the two interest rates is 3%.

This indicates that the person is expecting the value of US dollars to increase or appreciate by 3%.