Suppose a British bank offers a 3 percent interest rate while a U.S. bank offers a 7 percent interest rate. People must expect the U.S. dollar will

Question

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According to the interest rate parity theory, the difference in interest rates between two countries is offset by the expected change in exchange rates. With a 4% higher interest rate in the U.S., the dollar is expected to depreciate by 4% to maintain parity.

Suppose a British Bank Offers a 3 Percent Interest Rate