Assume that there is a free-floating exchange rate. Interest rates rise in the UK, relative to those abroad. Discuss the effect that you would expect this to have on exchange rates. You should consider the effect on currency supply and demand, and illustrate your answer with a diagram. You should also consider how this relates to the concept of uncovered interest rate parity, and discuss this with the help of an equation.
Assume that there is a free-floating exchange rate. Interest rates rise in the UK, relative to those abroad. Discuss the effect that you would expect this to have on exchange rates. You should consider the effect on currency supply and demand, and illustrate your answer with a diagram. You should also consider how this relates to the concept of uncovered interest rate parity, and discuss this with the help of an equation.
Chapter22: International Finance
Section: Chapter Questions
Problem 10QP
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Transcribed Image Text:Assume that there is a free-floating exchange rate. Interest rates rise in the UK,
relative to those abroad. Discuss the effect that you would expect this to have on
exchange rates. You should consider the effect on currency supply and demand, and
illustrate your answer with a diagram. You should also consider how this relates to the
concept of uncovered interest rate parity, and discuss this with the help of an equation.
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