The next questions refer to the following.
Suppose prices in the US are twice as high as those in England, but the US interest rate is 4% while the interest rate in England is 8%. No inflation is expected in either country.
-Under these assumptions,the market would be expecting

Question

Quizplus · Accepted Answer

The difference in interest rates between the US and England suggests that there is greater demand for loans in England as compared to the US. This increased demand for loans in England results in an increased demand for English currency, which will appreciate in value. Additionally, prices in the US are twice as high as those in England, suggesting that the US dollar is overvalued. Therefore, we would expect the dollar to appreciate to some extent in order to bring parity to the two currencies. The combination of these two factors suggests that the dollar is likely to appreciate by 4% in the near term.

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