The U.S. inflation is expected to be 5 percent, while British inflation is expec

Question

The U.S. inflation is expected to be 5 percent, while British inflation is expected to be 3 percent. The interest rate offered on pounds is 7%, and the U.S. interest rate is 7%. If the international Fisher effect (IFE) holds between the United States and the United Kingdom, what does this say about real interest rates expected by British investors?
The U.S. inflation is expected to be 5 percent, while British inflation is expected to be 3 percent. The interest rate offered on pounds is 7%, and the U.S. interest rate is 7%. If the international Fisher effect (IFE) holds between the United States and the United Kingdom, what does this say about real interest rates expected by British investors?
The U.S. inflation is expected to be 5 percent, while British inflation is expected to be 3 percent. The interest rate offered on pounds is 7%, and the U.S. interest rate is 7%. If the international Fisher effect (IFE) holds between the United States and the United Kingdom, what does this say about real interest rates expected by British investors?

Explanation / Answer

Answer:

real interest rates expected by British investors are (5-3) 2 percentage points above the real interest rates expected by U.S. investors.

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