If interest rates rise unexpectedly in Britain, and do not change in the European Union, will...

If interest rates rise unexpectedly in Britain, and do not change in the European Union, will the British pound appreciate or depreciate against the euro? Note: the rise in interest rates in Great Britain is not associated with inflation

a) explain your answer

Expert Solution

If interest rates rise unexpectedly in Britain, and do not change in the European Union Then british pound appreciate
Supply and demand for sterling determines the exchange rate of the pound.

If demand for sterling goes up, then its price will too.

That is affected by lots of different factors, including:

Economy: Strong economies have strong currencies because other countries want to invest there. They need the local currency to do so, pushing up demand and the money's worth
Savings: When UK banks raise interest rates, holding savings or investments in pounds becomes more attractive, as you get more back for your money. So, demand for sterling increases
Prices: If UK goods are cheaper than those abroad, they will be attractive to foreign businesses who will need sterling to purchase them. This will tend to push up the exchange rate
Public finances : The state of a government's bank balance, or how much debt it has, can also affect the exchange rate
Speculation: The exchange rate is highly vulnerable to currency speculators, who buy and sell sterling based on expectations of future events

Much of the daily fluctuation in the exchange rate is because of these actions of the speculators and their confidence in the country's economic prospects.

jeff jeffy answered 2 years ago

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