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Suppose the nomianal interest rate for 1-year borrowing and lending in the U.S (i$) is currently...

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Economics

Suppose the nomianal interest rate for 1-year borrowing andlending in the U.S (i$) is currently 5%,while the nominal interestrate on 1 -year borrowing and leading in the U.K (1£) is 3%.Suppose,too, that nominal British pound/U.s. dollar exchange rateis to be £1.60/$ next year (i.e-1(£/$)e= £1.60/$).

A.According to the theory of Interest Rate Parity, what is thecurrent equilibrium nominal exchange rate between the pound and thedollar (E0(£/$))?

B. All else equal, if the U.S. interest rate increased to 8%,what would be the new equilibrium

exchange rate?

C.All else equal (i.e. with both i$and E eat their initiallevels), if the U.K. interest rate increased to 8%, what would thenew equilibrium exchange rate be?

Answer & Explanation Solved by verified expert
3.6 Ratings (547 Votes)
Think about the given issue here we should expect that the US be the outside nation and UK be the nation of origin Presently I be the home    See Answer
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