1.According to the international Fisher effect, if Venezuela has a much lower no
ID: 2741696 • Letter: 1
Question
1.According to the international Fisher effect, if Venezuela has a much lower nominal rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____.
a. lower; strengthen
b. higher; weaken
c. lower; weaken
d. higher; strengthen
2.If interest rates on the euro are consistently above U.S. interest rates, then for the international Fisher effect (IFE) to hold:
the value of the euro would often depreciate against the dollar.
the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
the value of the euro would remain constant most of the time.
the value of the euro would often appreciate against the dollar.
a.the value of the euro would often depreciate against the dollar.
b.the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
c.the value of the euro would remain constant most of the time.
d.the value of the euro would often appreciate against the dollar.
Explanation / Answer
Solution.
1.
According to the international Fisher effect, if Venezuela has a much lower nominal rate than other countries, its inflation rate will likely be higher than other countries, and its currency will weaken.
b. higher; weaken
2.
If interest rates on the euro are consistently above U.S. interest rates, then for the international Fisher effect (IFE) to hold:
a. The value of the euro would often depreciate against the dollar.
If country A's interest rate is 10% and country B's interest rate is 5%, country B's currency should appreciate roughly 5% compared to country A's currency. The rationale for the IFE is that a country with a higher interest rate will also tend to have a higher inflation rate. This increased amount of inflation should cause the currency in the country with the high interest rate to depreciate against a country with lower interest rates.
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