According to the international Fisher effect, if U.S. investors expect a 5 percent rate of domestic inflation over one year and a 2 percent rate of inflation in European countries that use the euro, and if they require a 3 percent real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:

Question

Quizplus · Accepted Answer

According to the international Fisher effect, the nominal interest rate equals the sum of the real interest rate and the expected rate of inflation. Therefore, the nominal interest rate for one-year U.S. Treasury securities would be 8 percent (3 percent real return + 5 percent expected domestic inflation). The expected inflation rate in European countries is not relevant to the calculation of the nominal interest rate for U.S. Treasury securities.

According to the International Fisher Effect, If U