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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The higher interest rate in the U.S. suggests that demand for the dollar will increase, causing its value to appreciate. However, the difference in interest rates between the two countries suggests that investors are willing to forgo the higher interest rate in the U.K. for the opportunity to earn a higher return in the U.S. This increased demand for dollars will cause the pound to depreciate relative to the dollar, by approximately 4 percent.

Suppose a British Bank Offers a 3 Percent Interest Rate