Assume That U

Multiple Choice

Assume that U.S. and British investors require a real return of 2 percent. If the nominal U.S. interest rate is 15 percent, and the nominal British rate is 13 percent, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.

A) 2 percentage points above; depreciate by about 2 percent
B) 3 percentage points above; depreciate by about 3 percent
C) 3 percentage points below; appreciate by about 3 percent
D) 3 percentage points below; depreciate by about 3 percent
E) 2 percentage points below; appreciate by about 2 percent