Suppose the dollar interest rate and the pound sterling interest rate are the same, 5 percent per year. What is the relation between the current equilibrium $/₤ exchange rate and its expected future level? Suppose the expected future $/₤ exchange rate, $1.52/₤, remains constant as Britain’s interest rate rises to 10 percent per year. If the U.S. interest rate also remains constant, what is the new equilibrium $/₤ exchange rate?
