As a theory of exchange rate determination,the Fisher effect
A) holds that exchange rates should reflect the price differences of each and every product between countries.
B) reflects the Big Mac Index.
C) links the forward exchange rate of a foreign currency to its spot rate.
D) All of the above
E) None of the above

Question

Quizplus · Accepted Answer

The Fisher effect is the observation that a country's nominal interest rate (what a borrower actually has to pay for a loan)comprises both the inflation rate in that country and the real interest rate that borrowers are paying.Purchasing Power Parity holds that exchange rates should reflect the price differences of each and every product between countries and is reflected in the Big Mac Index.Interest Rate Parity is most closely links the forward exchange rate of a foreign currency to its spot rate.

As a Theory of Exchange Rate Determination,the Fisher Effect