Question

If British interest rates suddenly increase substantially relative to U.S. interest rates, the demand by U.S. investors for British pounds _______, and the British pound will _______.

Answer 1

Answer:

If British interest rates suddenly increase substantially relative to U.S. interest rates, the demand by U.S. investors for British pounds increases, and the British pound will appreciate.

Answer 2

Answer:

The correct answer is letter "A": increases; appreciate

Explanation:

Interest rates refer to the percentage that is paid over possessing a given asset or commodity. The higher the interest rate the higher the demand for the asset or commodity. The lower the interest rate offered, the lower the demand. While talking about currencies, the higher the interest rate, the more the currency will appreciate.

Therefore, if the British interest rate is higher than the U.S. interest rate, U.S. investors are likely to increase the demand of the British currency (pounds) which provokes that currency to appreciate over the U.S. dollars.