When a rise in the expected inflation rate in one nation relative to others will be associated with an expected fall in the first nation's exchange rate accompanied by a rise of its expected interest rate relative to foreign expected interest rates,we are describing the
A)International Fisher Effect
B)Purchasing Power Parity
C)Interest Rate Parity
D)Unbiased forward rate

Question

Quizplus · Accepted Answer

The International Fisher Effect states that a higher expected inflation rate in one country relative to others will lead to a decrease in its exchange rate and an increase in its interest rate relative to foreign interest rates. This is because investors will demand a higher return on their investments to compensate for the expected loss in purchasing power due to inflation.

When a Rise in the Expected Inflation Rate in One