The theory that nominal interest rates (i)in each country equal the required rate of interest (r)and expected rate of inflation (I)over the period for which the funds are to be lent is referred to as:
A)the Law of One Price.
B)the Purchasing Power Parity conundrum.
C)the Fisher Effect.
D)the Big Mac index.

Question

Quizplus · Accepted Answer

The theory described in the question is known as the Fisher Effect, which states that nominal interest rates in a country are equal to the required rate of interest and expected inflation rate. The Law of One Price refers to the idea that the same product should have the same price in different countries, the Purchasing Power Parity conundrum relates to the difficulty in achieving this, and the Big Mac Index is a method for comparing the purchasing power of currencies.

The Theory That Nominal Interest Rates (I)in Each Country Equal