Question

Which of the following is most unlikely to impact on the level of net foreign investment in Australia?

a.   the relative return on the NYSE compared to the ASX

b.   changes in the monetary policy settings of the U.S Federal Reserve

c.   a decrease in humanitarian foreign aid by the Federal Government

d.   an increase in perceived default risk of government bonds issued by some European nations  

Important: can you please explain your answer properly

Answer 1

The answer is (c) decrease in humanitarian foreign aid by the Federal Government

Investors care about making the maximum out of their money. If the federal government decides to decrease foreign aid, ti doe not affect the return on their money and hence is unlikely to impact on the level of net foreign investment in Australia.

(a) is false as stock market returns reflect the state of the economy and affect foreign investment.

(b) is false as increase and decrease of interest rates by the US Fed directly changes the return the investors get on investing in US v/s Australia.

(d) is false as increase in perceived default risk of government bonds issued by some European nations will shift the investment from Europe to other economies and this may include Australia.