The interest rate on pounds in the United Kingdom is 8 percent. The interest rate in the United States is 5 percent. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

Question

Quizplus · Accepted Answer

According to interest rate parity, the difference in interest rates between two countries should be equal to the difference in their exchange rates. In this case, the higher interest rate in the UK would lead to a stronger pound relative to the dollar. Therefore, US investors would earn a lower return domestically compared to British investors earning domestically due to the exchange rate advantage enjoyed by the latter.

The Interest Rate on Pounds in the United Kingdom Is