Hello I need assistance answering these 2 multiple choice qu

Hello,

I need assistance answering these 2 multiple choice questions.

According to the IFE, if British interest rates are lower than U.S. interest rates O a. the British pound will depreciate against the dollar. b. the British pound will appreciate against the dollar O c. today\'s forward rate of the British pound will equal today\'s spot rate. O d. the British inflation rate will decrease. O e. the British pound\'s value will remain constant.

Solution

Question 1

According to IFE (International Fischer Equation), states that difference between the exchange rate of two currencies is approximately equal to their countries\' nominal interest rates. According to this theory, if interest rates are lower in a country relative to other country, the currency for that country should appreciate relative to the second country\'s currency. This is because it assumes that inflation will be lower in country with low interest rates and hence the currecy would appreciate.

So, answer for question is b. British pound would appreciate relative to dollar

Question 2

Answer is Option d. All the three statements are true

IRP and IFE are based on interest rate differentials and PPP is based on inflation differential