Macroeconomics 11th Edition by Michael Parkin

Exercise 35

The U.K. pound is trading at 1.50 U.S. dollars per U.K. pound. There is purchasing power parity at this exchange rate. The interest rate in the United States is 1 percent a year and the interest rate in the United Kingdom is 3 percent a year.
a. Calculate the U.S. interest rate differential.
b. What is the U.K. pound expected to be worth in terms of U.S. dollars one year from now
c. Which country more likely has the lower inflation rateHow can you tell