A foreign currency will, on average, depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

Question

Quizplus · Accepted Answer

This statement is known as the international Fisher effect and is based on the idea that higher inflation in a country erodes the purchasing power of its currency. As a result, the currency is expected to depreciate relative to a currency with lower inflation, such as the U.S. dollar.

A Foreign Currency Will, on Average, Depreciate Against the U