Question

You have just landed in the Kuwaiti International Airport, located in Farwaniya. Your host, who is a knowledgeable Finance Ministry official, told you in a rather unhappy way that the KWD (Kuwaiti dinar) has depreciated by 10% against the USD over the past 12 months. You recall having read the Wall Street Journal earlier in the day that the U.S. nominal interest rate is 2%, and based on what you know about the International Fisher Effect, the Kuwaiti nominal interest rate must be _ _%. [Assumptions: 1) Use the approximate formula, 2) currency of interest is the KWD] 02 10 12 08

Answer 1

As per international fisher theory, difference of interest rates between two countries nullifies the difference of exchange rates. in other words, interest rate difference removes to effect of currency Depreciation or appreciation  
So difference in interest rates = Currency difference in % terms  
Currency of Kuwait depreciated by 10%  
Nominal interest rate of US is 2%  
Kuwait interest Rate - US interest rate = Depreciation or appreciation of Kuwait Currency  
K-2% = 10%  
K = 2%+10%= 12%  
  
So Kuwait interest rate must be 12%