With the Foreign Interest Rate in the IS Model, an Increase

question 122

Multiple Choice

With the foreign interest rate in the IS model, an increase in the foreign interest rate causes ________ because ________.

• A) the IS curve to shift right; it leads to a depreciation of the domestic real exchange rate
• B) rightward movement along the IS curve; it leads to a depreciation of the domestic real exchange rate
• C) the IS curve to shift left; it leads to a depreciation of the domestic real exchange rate
• D) the IS curve to shift right; it leads to an appreciation of the domestic real exchange rate
• E) the IS curve to stay put; the change in investment and net exports offset each other

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Definitions:

Financial Risks

The risk of experiencing financial loss from an investment or entrepreneurial activity.

Financial Leverage

The use of borrowed funds to increase the potential return of an investment, which also increases the risk of loss.

Sensitivity of EPS

The degree to which a company's earnings per share (EPS) is affected by fluctuations in its operating income.

ROE

A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.