Use the following information for the following questions Prices are flexible so that nominal interest rates can reflect expectations about...

nominal and real interest rates and inflation rates discussed in class. Show your work. (6 points)

b. Suppose that there was news that the Federal Reserve had moved to lower U.S. nominal interest rates but that expectations about U.S. and U.K. inflation rates were unchanged. Note the direction of change for the variables below as interest arbitrage takes place. You do not need to explain----just have an arrow pointing up or down (2 points each---4 points total)

iUK

ee = $/£ (expected exchange rate in future)