If the interest rate in the U.S.is i_$ = 5 percent for the next year and interest rate in the U.K.is i_£ = 8 percent for the next year,uncovered IRP suggests that A)the pound is expected to depreciate against the dollar by about 3 percent. B)the pound is expected to appreciate against the dollar by about 3 percent. C)the dollar is expected to appreciate against the pound by about 3 percent. D)the pound is expected to depreciate against the dollar by about 3 percent and the dollar is expected to appreciate against the pound by about 3 percent.

Question

Quizplus · Accepted Answer

Uncovered Interest Rate Parity (IRP) suggests that the currency in the country with a higher interest rate (in this case, the U.K. with 8%) is expected to depreciate against the currency in the country with a lower interest rate (the U.S. with 5%). This depreciation is expected to be approximately the difference in the interest rates, which is 3%. Therefore, the pound is expected to depreciate against the dollar by about 3%, and conversely, the dollar is expected to appreciate against the pound by about 3%.

If the Interest Rate in the U