Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.

Question

​Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.

Quizplus · Accepted Answer

The international Fisher effect states that the difference in nominal interest rates between two countries is equal to the expected difference in inflation rates. If the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable, then the expected difference in inflation rates must decrease. This implies that the U.S. inflation rate is expected to decrease relative to the Chilean inflation rate. According to the law of one price, this implies that the Chilean peso should depreciate against the dollar.

​Assume That the U

Assume That the U