When one country has higher nominal interest rates than another ...

[vinney12]

When one country has higher nominal interest rates than another country, the high-interest-rate currency is expected to ________ relative to the low-interest-rate currency.
 
  A) depreciate
  B) appreciate
  C) stay constant
  D) None of the above

Question 2

Refer to above figure. In autarky, Country P was producing at point 5. With trade, would its production point be found above or below point 5? Explain why.
 
  What must happen in the K/L intensity ratio in the production of each of the products in this country when moving from autarky to free trade?

[strudel15]

Answer to Question 1

A

Answer to Question 2

The point of production with trade will be above point 5. The country will be shifting its production composition to be more heavily weighted in labor intensive good, C. Within each industry, the production technique will be more capital intensive, since with the rising relative wage, the optimal point of production will involve sliding around the isoquants in the direction of saving on the now relatively more expensive labor.

[vinney12]

Correct answers!

[strudel15]

Great! Please up vote