The international Fisher effect is valid in the long run, because:
A)Inflation rates are equal in different countries
B)Investors will move their money into countries with high real interest rates
C)Investors will move their money into countries with high nominal interest rates
D)Investors will move their money into countries with low inflation

Question

Quizplus · Accepted Answer

Investors will move their money into countries with high real interest rates to earn a higher return on their investment. This will cause the demand for the currency of the country with the high real interest rate to increase, which will lead to an appreciation of the currency. The appreciation of the currency will make the goods and services in the country with the high real interest rate more expensive for foreigners, which will reduce the demand for these goods and services. The reduction in demand will lead to a decrease in the inflation rate in the country with the high real interest rate.

The International Fisher Effect Is Valid in the Long Run