I am a bit confused on this question: does it, the reallocation of assets should from country with current account deficit to country with current account surplus? In this case to Country D? (the text in answer A is not correct anyway with “puts downward pressure on asset prices”)
The answer in the mock exam is C
Here is the text in curriculum:
Anyone, please?
im pretty much in the same boat not quite figuring out the answer. but i will try to remember the consequence of being CA deficit where as a debtor , i am trying to borrow/finance from creditor by offering higher ROR, therefore with high discount rate, the asset pricing is lower. where as CA surplus country, somewhere is Europe, the asset pricing is high due to lower ROR.
How about China with current account surplus and high rate of return?
I also thought A should be the right answer, but as with carry trade, you want to borrow in the country with low rate and invest in country with higher rate. Since country E is riskier and has higher required return, funds will flow to Country E.
