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 mostly reflect differences in expected inflation rates. It suggests that as long as there are no restrictions on the movement of capital between countries, the difference in nominal interest rates in two countries will equal the expected change in their exchange rate. Therefore, investors should adjust the nominal interest rates for differences in expected inflation rates to compare the real interest rates between countries.

The International Fisher Effect Predicts That Differences in Nominal Interest