Suppose that one-year Treasury bills yield 6 percent in the United States and 4 percent in Britain. Investors will be indifferent between them if they expect the dollar to
A) depreciate against the pound by approximately 2 percent.
B) appreciate against the pound by approximately 2 percent.
C) depreciate against the pound by approximately 33 percent.
D) appreciate against the pound by approximately 33 percent.

Question

Quizplus · Accepted Answer

Investors will be indifferent between the two investments if the expected return from both is the same. If U.S. Treasury bills yield 6 percent and British ones yield 4 percent, the dollar must depreciate against the pound by approximately 2 percent to equalize the returns, making the higher nominal interest rate in the U.S. offset by the expected currency depreciation.

Suppose That One-Year Treasury Bills Yield 6 Percent in the United