Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.

Question

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According to the International Fisher Effect (IFE), the difference in nominal interest rates between two countries is equal to the expected change in exchange rates between their currencies. If the pound is expected to depreciate by 1.5%, the U.S. interest rate should be 5% - 1.5% = 3.5%. The closest option is 3.43%.

Assume That the Interest Rate Offered on Pounds Is 5