If US investments begin to offer a real rate of interest tha

If U.S investments begin to offer a real rate of interest that is higher than the real rate that can be earned on German investments, we can expect:

A: an increase in the price of the dollar in terms of German marks

B: an increase in the supply of dollars by those holding U.S. dollars

C: a decrease in the equilibrium exchange rate of German marks per dollar

D: an increase in the supply of dollars by those holding German marks

E: all of the above

Solution

If US investments offer a real rate of interest higher than the real rate earned on german marks clearly more and more people will invest in US dollars and withdraw their investments in german marks.This clearly would result in an increase in demand for dollars and lower demand for german marks.Thus price of dollar would increase while that of german marks would decrease.Hence

A) an increase in price of dollar in terms of german marks.