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3. Suppose that one-year interest rate is 12% for the British pound and 9% for the U.S. dollar. (a) If the current exchange rate St
3. Suppose that one-year interest rate is 12% for the British pound and 9% for the U.S. dollar. (a) If the current exchange rate St = $1.63/, what is the expected future exchange rate in one year? (5 marks) (b) Suppose a change in expectations regarding future U.S. inflation rate causes the expected future spot rate to decline to $1.52=. By how much would the U.S. interest rate change? (5 marks)
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