Assuming that the international Fisher effect is holding, what will be the effect of an increase in nominal interest rate on the currency?
A)Currency will appreciate.
B)Currency will depreciate.
C)No significant change in exchange rate.
D)Currency will sell at a forward premium.

Question

Quizplus · Accepted Answer

According to the international Fisher effect, an increase in nominal interest rates is expected to lead to an increase in expected inflation rates. As investors seek higher returns in countries with higher interest rates, demand for that currency increases, driving up its value or causing it to appreciate.

Assuming That the International Fisher Effect Is Holding, What Will