Assume that the uncovered interest parity condition holds.Also assume that the U.S.interest rate is less than the U.K.interest rate.Given this information,we know that investors expect
A)the pound to depreciate.
B)the pound to appreciate.
C)the dollar-pound exchange rate to remain fixed.
D)the U.S. interest rate to fall.
E) none of the above

Question

Quizplus · Accepted Answer

According to uncovered interest parity, the difference between the interest rates should be equal to the expected exchange rate change. If the U.S. interest rate is less than the U.K. interest rate, investors expect the pound to depreciate, as they will expect to receive a higher return in pounds if they convert their dollars to pounds and invest in the U.K. Therefore, the best choice is A, the pound to depreciate.

Assume That the Uncovered Interest Parity Condition Holds