Assume that U.S. interest rates are 6%, while British interest rates are 7%. 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 pound's value over the next year.
B) depreciation of pound's value over the next year.
C) no change in pound's value over the next year.
D) not enough information to answer this question.

Question

Quizplus · Accepted Answer

According to the international Fisher effect, the difference in interest rates between two countries determines the expected change in their exchange rates. In this case, because the British interest rate is higher than the U.S. interest rate, the international Fisher effect suggests that the pound is expected to depreciate against the dollar. Therefore, the answer is B.

Assume That U