Assume that the interest parity condition holds.Also assume that the U.S.interest rate is 6% while the U.K.interest rate is 8%.Given this information,financial markets expect the pound to
A)depreciate by 14%.
B)depreciate by 2%.
C)appreciate by 2%.
D)appreciate by 6%.
E) appreciate by 14%.

Question

Quizplus · Accepted Answer

The interest rate parity condition implies that the currency of the country with the higher interest rate (in this case, the U.K.) is expected to depreciate to offset the higher interest income. Since the U.K. interest rate is 2% higher than the U.S. rate, financial markets would expect the pound to depreciate by 2% to maintain parity.

Assume That the Interest Parity Condition Holds