Question

The International Fisher Effect suggests that Multiple Choice an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country. any forward premium or discount is equal to the expected change in the exchange rate. any forward premium or discount is equal to the actual change in the exchange rate. the nominal interest rate differential reflects the expected change in the exchange rate.

Answer 1

Answer:

Option (D) is correct.

Explanation:

According to the International Fisher Effect, the spot exchange rate moves identically in the opposite direction of the difference between the nominal interest rates of the two countries.

The formula for calculating percentage change in exchange rate as International Fisher Effect is:

E = [(iA - iB)/(1+iB)]

where E is the expected change in the exchange rate

iA = interest rate of Country A

iB = the interest rate of Country B

The equation can further be simplified as:

E = [(1+iA)/(1+iB)] - 1

From the above formula or equation, we can easily determine the change in the exchange rate with the availability of the interest rates of the two nations.