Question

Assume that the uncovered interest parity condition holds. Also assume that the U.S. interest rate is greater than the U.K. interest rate. Given this information, we know that investors expect ________.
Group of answer choices:
O the pound to depreciate.
O the pound to appreciate.
O the dollar-pound exchange rate to remain fixed.
O the U.S. interest rate to fall.

Answer 1

Answer:

Assume that the uncovered interest parity condition holds. Also assume that the U.S. interest rate is greater than the U.K. interest rate. Given this information, we know that investors expect the pound to appreciate.

Explanation:

Considering the assumption that the uncovered interest parity condition holds and also that the interest rate in the U.S is greater than the U.K interest rate.

The above assumptions imply that there will be a depreciation in the dollar and an appreciation in the pound.

Therefore, investors would expect the pound to appreciate.