A rise in the inflation rate in one nation relative to others will be associated with a fall in the first nation's exchange rate and with a rise of its interest rate relative to foreign interest rates.The two conditions combined result in the _________ Effect.
A)Fisher
B)Herstatt
C)Unbiased forward rate
D)International Fisher

Question

Quizplus · Accepted Answer

This effect is known as the International Fisher Effect, which states that the difference in interest rates between two countries is equal to the expected change in their exchange rates. In other words, if a country's inflation rate is higher than others, its interest rate will also rise, causing its currency to depreciate in the long run. The International Fisher Effect is based on the concept of real interest rates, which take inflation into account.

A Rise in the Inflation Rate in One Nation Relative