Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries?

Question

Quizplus · Accepted Answer

The international Fisher effect (IFE) suggests that the percentage change in the spot exchange rate of a currency should be equal to the interest rate differential between two countries. Therefore, option C is the correct answer. Option A (absolute form of PPP) suggests that the exchange rate between two currencies should adjust to ensure that the same basket of goods has the same price in both countries. Option B (relative form of PPP) suggests that changes in the exchange rate should reflect changes in the relative price levels between two countries. Option D (interest rate parity) suggests that the difference in interest rates between two countries should reflect the expected change in their exchange rate.

Which of the Following Theories Suggests the Percentage Change in Spot