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26. Assume that US, and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about what percentage points below the U.S. inflation rate, and the British pound is expected to appreciate by what percentage?

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Answer #1

We know:


Nominal rate = Real rate +Inflation

Since real rate is equal, the difference in nominal rate come due to difference in inflation.

Hence British inflation rate shall be approximately 2% lower than that of USA.

As a result, the British pound is slated to appreciate 2% vis a vis US dollar

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