Question

3. If the U.S. interest rate is 4% per year and the U.K. interest rate is 9% per year, which of the following statements is TRUE? (a) The dollar will depreciate 13% in one year (b) The pound will depreciate 13% in one year (c) The pound will appreciate 5% in one year (d) The dollar will appreciate 5% in one year 4. Consider the sales of McDonald's Big Mac in the United States and Japan, identify the option that shows whether the law of one price will hold or not, and state whether the relative price, dusiOREIGN, s greater than, less than, or equal to 1 and the reason behind it (a) iys/FOREIGN 1 because the LOOP assumptions are met in this case. 1 because the LOOP assumptions are not met in this case given US/FOREIGN that there are non-tradable elements in the production of the Big Mac, such as labor and rent. (c) qs/FOREIGN 1 because the LOOP assumptions are met in this case. (d) qUS/FOREIGN, 1 because the LOOP assumptions are not met in this case given that there are non-tradable elements in the production of the Big Mac, such as labor and rent

Answer 1

The U.S interest rate is 4% per year and the U.K. interest rate is 9% per year Given that, U.S interest rate = 4% per year U.K. interest rate = 9% per year Formulae: - EA = I - i* ---(1) Here I = interest rate at home, 4% i* = interest rate in foreign, 9% EA = Expected appreciation for a foreign currency. Now, If U.K. is foreign And, U.S is a home Then Eqn (1) become EA = 4% - 9% EA = -5% Hence Pound depreciated by 5%