The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of:

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According to the IFE, the exchange rate should adjust in such a way that the interest rate differential is equalized by the expected change in exchange rates. Thus, the expected change in the exchange rate between the U.K. and the U.S. can be calculated as follows: (1 + 0.07)/(1 + 0.05) - 1 = 0.0191 or 1.91%. Therefore, the new exchange rate between the British pound and the U.S. dollar should be: $1.50 x (1 + 0.0191) = $1.47.

The Interest Rate in the U