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 between two countries' interest rates will result in the expected change in their exchange rates. Since the British interest rate is higher than the U.S. interest rate, the expected change in the future spot rate is a depreciation of the pound's value relative to the dollar. Therefore, choice B is the correct answer.

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