Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:
A)appreciation of the pound's value over the next year.
B)depreciation of the pound's value over the next year.
C)no change in the pound's value over the next year.
D)not enough information to answer this question.

Question

Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:​
A)appreciation of the pound's value over the next year.
B)depreciation of the pound's value over the next year.
C)no change in the pound's value over the next year.
D)not enough information to answer this question.

Quizplus · Accepted Answer

According to the international Fisher effect, the difference in interest rates between two countries should reflect in the exchange rate. In this case, since the UK has a higher interest rate than the US, the expected exchange rate would reflect a depreciation in the pound's value (i.e., it will take more pounds to buy one dollar).

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