[SOLUTION] Non-Class Learning Activity

1. Suppose American investors learn of an increase in the British interest rate by theBank of England. Ceteris paribus, how will they react? Will this increase in the Britishinterest rate alter the behavior of British investors? Use the Interest Rate Parity (IRP)diagram to answer the question.2. Diagrammatically describe the adjustment to a new equilibrium in the IRP modelwhen the Fed decreases the US domestic interest rate. (Consider the British poundas the foreign currency.)

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