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 because they want 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 in turn cause the value of the currency to appreciate. This appreciation will offset the effects of inflation, so that the real interest rate will remain the same.

The International Fisher Effect Is Valid in the Long Run