Question

According to the international Fisher effect, if the U.S. dollar interest rate is 2% higher than...

According to the international Fisher effect, if the U.S. dollar interest rate is 2% higher than a comparable Japanese yen interest rate, then the market expects the _________ to _________.

a.yen; depreciate by about 2%

b.dollar; appreciate by about 2%

c.yen; appreciate by about 2%

d.U.S. dollar; remain unchanged

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Answer #1

Correct option is (c)

Explanation:-As per international fisher effect, disparity between the exchange rate of two currencies is approximately equal to Difference in the Nominal interest rate of two countries.

Furthet,we can say that if interest rate of one currency is higher than interest rate of another currency then that one currency will Depreciate and another currency will appreciate in future.

Therefore if US dollar interest rate is higher than yen then US dollar will depreciate and yen will appreciate in future by the difference in the Interest rate of two currencies i.e,2%

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