The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in:
A)Real rates of interest
B)Purchasing power parity
C)The standard of living
D)Expected inflation

Question

Quizplus · Accepted Answer

The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in expected inflation. This is based on the theory that investors will demand compensation in the form of a higher nominal interest rate to offset the effects of inflation. Therefore, if investors expect higher inflation in one country compared to another, they will require a higher nominal interest rate on investments in the higher inflation country.

The International Fisher Effect Predicts That Differences in Nominal Interest