If the U.S. interest rate is 4% per year and the U.K. interest rate is 9% per year, which of the following statements is TRUE?
A) The dollar will depreciate 4% in one year.
B) The pound will depreciate 9% in one year.
C) The pound will depreciate 5% in one year.
D) The dollar will appreciate 4% in one year.

Question

Quizplus · Accepted Answer

According to the interest rate parity theory, the difference between the two interest rates should equal the percentage change in the exchange rate over time. Thus, if the U.K. interest rate is 9% and the U.S. interest rate is 4%, the pound should depreciate by approximately 5% in one year relative to the dollar. Therefore, option C is the correct choice.

If the US Interest Rate Is 4% Per Year and the U