U.S. interest rates are currently 7 percent and the real rate of interest has been about 2 percent over the past 20 years. Today's spot rate is $1.7921 per British pound. Jones predicts that the spot exchange rate for British pounds will be $1.8653 per pound in one year. Using the information above and assuming the expected inflation rate in the U.S. is 6 percent, Jones has arrived at her conclusion based upon the assumption that the inflation rate in Great Britain will be:
A. 10.3%.
B. 1.8%.
C. 8.4%.
D. 3.6%.
Answer:B
U.S. interest rates are currently 7 percent and the real rate of interest has been about 2 percent over the past 20 years. Today's spot rate is $1.7921 per British pound. Jones predicts that the spot exchange rate for British pounds will be $1.8653 per pound in one year. Using the information above and assuming the expected inflation rate in the U.S. is 6 percent, Jones has arrived at her conclusion based upon the assumption that the inflation rate in Great Britain will be:
A. 10.3%. B. 1.8%. C. 8.4%. D. 3.6%.