If nominal British interest rates are 3 percent and nominal U.S. interest rates are 6 percent, then the British pound (£) is expected to ____ by about ____percent, according to the international Fisher effect (IFE).

Question

Quizplus · Accepted Answer

The International Fisher Effect (IFE) suggests that the currency of the country with the lower interest rate (in this case, Britain) is expected to appreciate against the currency of the country with the higher interest rate (in this case, the U.S.). The expected percentage change in the exchange rate can be approximated by the difference in nominal interest rates, which is 6% - 3% = 3%. However, the exact calculation involves using the formula for the IFE, which results in an appreciation of approximately 2.9%.

If Nominal British Interest Rates Are 3 Percent and Nominal