Suppose interest rates fall sharply in the United States but are unchanged in Great Britain. Other things equal, under a system of ﬂoating exchange rates, we can expect the demand for pounds in
The United States to

Question

Quizplus · Accepted Answer

When interest rates fall in the United States but remain unchanged in Great Britain, investments in Great Britain become more attractive. This increases the demand for pounds in the United States as investors seek to buy British assets. Consequently, the supply of pounds in the exchange market decreases as more investors hold onto their pounds to invest in British assets. This leads to the depreciation of the dollar relative to the pound, as more dollars are needed to purchase the same amount of pounds.

Suppose Interest Rates Fall Sharply in the United States but Are