Assume that the interest parity condition holds.Also assume that the U.S.interest rate is 8% while the U.K.interest rate is 6%.Given this information,financial markets expect the pound to
A)depreciate by 14%.
B)depreciate by 2%.
C)appreciate by 2%.
D)appreciate by 6%.
E) appreciate by 14%.

Question

Quizplus · Accepted Answer

According to the interest rate parity condition, if the U.S. interest rate is higher than the U.K. interest rate, it implies that the financial markets expect the currency of the country with the lower interest rate (in this case, the pound) to appreciate relative to the currency of the country with the higher interest rate. The difference in interest rates is 2% (8% - 6%), so financial markets expect the pound to appreciate by 2%.

Assume That the Interest Parity Condition Holds