Question

Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place ____ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place ____ pressure on the value of the British pound.

Answer 1

Answer:

The correct answer is: downward; upward.

Explanation:

A higher inflation rate will put a downward pressure on the value of British pound. The value of British pound will decline in terms of US dollars. This is because inflation means that the price level will rise. This will cause the demand for British goods to decline. Consumers will prefer to purchase American goods. As a result the demand for dollars and supply of pounds will increase decreasing the value of pounds.

As interest rate in UK becomes higher than interest rate in US, the investors will prefer to invest in UK. This will increase the demand for British pounds and supply of dollars. As a result, the value of British pounds will increase.