Change the annual interest rate so as to stabilize the spot

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Assume that the current exchange rate between the Grand Fenwick Pound (GFP) and the $ equals unity, while the annual interest rates of both countries equals 6%. However, the GFP suffers from a speculative attack and the Governor of the Central Bank of the Grand Fenwick expects that this attack will lead to an annual depreciation of the GFP by 5%. By how much should the Governor of the Central Bank of the Grand Fenwick change the annual interest rate so as to stabilize the spot rate?

Reference no: EM132456385

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