The relation between interest rate differentials and expected inflation differentials is called ______.

Question

Quizplus · Accepted Answer

The relation between interest rate differentials and expected inflation differentials is called the international Fisher relation, which states that the nominal interest rate differential between two countries should be equal to the difference between their expected inflation rates. This helps investors determine the real return on their investments after considering inflation. Choice A (forward parity) is not a commonly used term in finance. Choice B (interest rate parity) refers to the theory that exchange rates should adjust to equalize interest rates between countries. Choice C (relative purchasing power parity) refers to the theory that exchange rates should adjust to equalize the prices of baskets of goods between countries.

The Relation Between Interest Rate Differentials and Expected Inflation Differentials