Suppose Nominal Interest Rates in the U

question 11

Essay

Suppose nominal interest rates in the U.S.rise from 4.6% to 5% and decline in Britain from 6% to 5.5%,while U.S.consumer inflation remains unchanged at 1.9% and British inflation declines from 4% to 3%.In addition suppose,real growth in the U.S.is forecasted for next year at 4% and in Britain real growth is forecasted at 5%.Finally,suppose producer price inflation in the U.S.is declining from 2% to 1% while in Britain producer price inflation is rising from 2% to 3.2%.Explain what effect each of these factors would have on the long-term trend exchange rate ( £ per $)and why?

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