Question

If nominal British interest rates are 3 percent and nominal U.S. interest rates are 6 percent, then the British pound (£) is expected to ____ by about ____ percent, according to the international Fisher effect (IFE).

a) Appreciate; 3%
b) Depreciate; 3%
c) Appreciate; 6%
d) Depreciate; 6%

Answer 1

The British pound is expected to appreciate by about 3 percent against the U.S. dollar according to the international Fisher effect, due to the interest rate differential.

Step-by-step explanation:

If nominal British interest rates are 3 percent and nominal U.S. interest rates are 6 percent, then according to the international Fisher effect (IFE), the British pound (£) is expected to appreciate by about 3 percent. The IFE posits that the currency of the country with a lower interest rate will appreciate in value relative to the currency of the country with the higher interest rate, by the difference between the two interest rates, assuming that real interest rates are equal across countries. Therefore, the correct answer to this question is (a) Appreciate; 3%.