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Question 5 [5 marks] Assume the following information is observed UK US Expected inflation over 12 months 4.0% 2.0% Nominal interest rate 6.0% 3.0% The
Question 5 [5 marks]
Assume the following information is observed
| UK | US | |
| Expected inflation over 12 months | 4.0% | 2.0% |
| Nominal interest rate | 6.0% | 3.0% |
The spot price of British pound (GBP) is $1.30. Answer questions a) and b) below.
- Suppose the purchasing power parity (PPP) holds precisely. According to PPP and the information provided above, what is your expectation about percentage change in GBP spot price over the next 12 months?
- Suppose the international Fisher effect (IFE) holds precisely. According to the IFE and the information provided above, what is your expectation about percentage change in GBP spot price over the next 12 months?
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