Question

Assume the spot rate of the British pound is $1.71. The expected spot rate 1 year from now is assumed to $1.63. What percentage depreciation does this reflect? Do not round intermediate calculations. Round your answer to two decimal places. Enter your answer as a positive value. Expected depreciation: 4.09 % Assume U.S. interest rates rise relative to British interest rates. Other things being equal, how should Enl affect the

(a) U.S. demand for British pounds,
(b) supply of pounds for sale, and
(c) equilibrium value of pound?

Answer 1

The expected depreciation of the British pound is 4.68%. Rising U.S. interest rates relative to British rates typically lead to a decrease in demand for the pound, an increase in supply, and a consequent decrease in its equilibrium value.

Step-by-step explanation:

The percentage depreciation of the British pound relative to the U.S. dollar is calculated by taking the difference between the initial spot rate and the expected spot rate, dividing by the initial spot rate, and then multiplying by 100. Here, the initial spot rate is $1.71 and the expected rate is $1.63, therefore the calculation is (($1.71 - $1.63) / $1.71) * 100 = 4.68%. This reflects a 4.68% expected depreciation of the pound.

When U.S. interest rates rise relative to British interest rates, we can expect the following effects:

• (a) A decrease in U.S. demand for British pounds due to higher returns available in the U.S.,
• (b) An increase in the supply of pounds for sale as investors may seek to invest in U.S. dollar-denominated assets, and
• (c) A decrease in the equilibrium value of the pound versus the dollar, as the increased supply and decreased demand exert downward pressure on the pound's value.