Question

According to the international Fisher​ Effect, if an investor purchases a​ 5−year Turkish bond that has an annual interest rate of​ 5% rather than a comparable British bond that has an annual interest rate of​ 7%, then the investor must be expecting the​ ________ to​ ________ at a rate of at least​ 2% per year over the next 5 years. A. Turkish​ Lira; appreciate B. Turkish​ Lira; depreciate C. ​Pound; revalue D. ​Pound; appreciate

Answer 1

According to the international fisher effect, prices of two currency when accounted for inflation , remains the same in different countries

In this case, the investor has purchased Turkish bond @ 5% where as the British bond is trading @ 7% so he would be expecting an increase of inflation in Turkish Lira to an extentextent of 2%.

Rest of the options are false as you should not be expecting the pound to revalue or the Turkish Lira to depreciate.

Correct answer is option ( A) Turkish Lira, Appreciate.