Suppose That the One-Year Interest Rate in the United States

question 30

Multiple Choice

Suppose that the one-year interest rate in the United States is 6% and that the one-year interest rate in the United Kingdom is 3%. In the context of "uncovered" interest arbitrage and with other things equal, funds would tend to flow out of the United States and into the United Kingdom

• A) if the British pound is expected to depreciate by 2% relative to the dollar during the coming year.
• B) if the British pound is expected to depreciate by 5% relative to the dollar during the coming year.
• C) if the British pound is expected to appreciate by 2% relative to the dollar during the coming year.
• D) if the British pound is expected to appreciate by 5% relative to the dollar during the coming year.

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Definitions:

Efficiency

The optimal allocation and use of resources to produce goods and services in the most cost-effective and waste-free manner.

P > MC

Indicates a scenario in price (P) is greater than marginal cost (MC), suggesting that a firm could potentially increase profits by increasing production since each additional unit produced costs less than the price it would sell for.

Monopoly

A market structure in which a single seller controls the entire market for a good or service, with no close substitutes.

Monopoly Model

A market structure where a single seller dominates the market, facing no competition, resulting in high prices and restricted output.