Hello I need assistance answering these 2 multiple choice qu

Hello,

I need assistance answering these 2 multiple choice questions.

The interest rate in the United Kingdom is 7 percent, while the interest rate in the United States is 5 percent. The spot rate for the British pound is $1.5o. According to the international Fisher effect (IFE), the British pound should adjust to a new level of O a. $1.47. b. $1.53 ? ?. $1.57. O d. $1.43

Solution

1. According to the IFE,

Expected Spot Rate = Spot Rate x [(1 + i_P)/(1 + i_B)]

= $1.50 x [1.05/1.07] = $1.47

So, Option \"A\" is correct.

2. Option \"A\" is correct.

According to PPP,

Future Spot Exchange Rate = Initial Spot Rate x [(1 + Inflation_P)/(1 + Inflation_B)]