The International Fisher Effect suggests that

Question

Quizplus · Accepted Answer

The International Fisher Effect suggests that the nominal interest rate differential reflects the expected change in the exchange rate. In other words, if investors expect a currency to depreciate, they require a higher interest rate to compensate for the expected loss of purchasing power. Therefore, the nominal interest rate in a country is influenced by the expected change in the exchange rate, and this relationship is known as the International Fisher Effect. Choices A and B are incorrect as they suggest that the forward premium or discount is either equal to the expected or actual change in the exchange rate, which is not necessarily true. Choice D is also incorrect as it suggests that the relationship between inflation and interest rates is proportional, but this may not always be the case.

The International Fisher Effect Suggests That