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

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When interest rates fall in the United States but remain unchanged in Great Britain, investors will find British assets more attractive, increasing the demand for pounds to buy those assets. The supply of pounds might decrease as investors hold onto their pounds or convert other currencies into pounds, expecting higher returns in Britain. This increased demand for pounds, coupled with a potentially reduced supply, would lead to the depreciation of the dollar relative to the pound.

Suppose Interest Rates Fall Sharply in the United States but Are