Question

According to the _____, for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

Answer 1

Answer:

According to the International fisher effect , for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

Explanation:

• International fisher effect states that if there is difference in nominal rate in two countries then this might affect the exchange rate of the two countries.

• If any country has higher nominal interest then there is a higher chance of inflation which might result in depreciation in there currency.

• For example XYZ country has 8% nominal interest and another ABC country have 10%. If we look closely, country ABC will be more appreciable but the country with higher interest will have higher inflation rate.

• So, inflation depreciates the currency of country as compared with the country with low nominal interest.