20) Assume that the current exchange rate between the U.K. pound and the U.S. dollar is 2 (E = 2.0). If interest parity holds, and the U.S. interest rate is 6% while the U.K. interest rate is 8%, the expected exchange rate in one year is: A) 1.98. B) 1.99. C) 2.01. D) 2.02. E) 2.04.
18) Assume policy makers in a fixed exchange rate regime decide to peg the exchange rate at a higher level. This is called: A) a revaluation. B) a devaluation. C) a depreciation. D) an appreciation.
4) Assume that the interest parity condition holds. Also assume that the U.S. interest rate is 6% while the U.K. interest rate is 8%. Given this information, financial markets expect the pound to: A) appreciate by 6%. B) appreciate by 2%. C) depreciate by 14%. D) depreciate by 2%. E) appreciate by 4%.
17) In an open economy under flexible exchange rates, an increase in the interest rate will cause an increase in which of the following? A) the exchange rate, E B) net exports C) investment D) all of the above E) none of the above.