Question

Which of the following states that 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
bandwagon effect
law of one price
international Fisher effect
Helms-Burton Act
purchasing power party (PPP) theory

Answer 1

Answer:

The correct answer is letter "C": international Fisher effect.

Explanation:

The International Fisher Effect is an approach that states the differences between the nominal interest rates of two countries can determine changes in the interest rates of those nations. According to the Fisher Effect, the higher the nominal interest rate of a country, the higher its inflation rate which provokes the nation's currency to depreciate.

This theory also establishes that the spot exchange rate (current price one currency is exchanged for another) fluctuates in an equal amount but opposite direction to the difference in nominal rates between two countries.