What would you expect to be the relationship between real rates of interest in Japan and Canada if inflation is expected to be 3% in Japan and 6% in Canada?
A)Japan's real interest rate should be 3% higher than in Canada.
B)Japan's real interest rate should be 3% lower than in Canada.
C)Japan's real interest rate should be half as high as in Canada.
D)Real interest rates should be equal in both countries.

Question

Quizplus · Accepted Answer

The Fisher Effect suggests that differences in nominal interest rates between countries reflect expected inflation differences, implying that real interest rates (nominal interest rate minus inflation rate) should be equal across countries assuming perfect capital mobility and ignoring risk premiums.

What Would You Expect to Be the Relationship Between Real