Question

The International Fisher Effect (IFE), Purchasing Power Parity (PPP) and Interest Rate Parity (IRP) are three very important theories in international finance, each with its own predictions and implication. Which of the following is correct? IRP suggests that a change in interest rate differential will not change the currency's forward premium/discount. According to purchasing power parity (PPP), if a foreign country's inflation rate is below the inflation rate at home, home country consumers will increase their imports from the foreign country and foreign consumers will lower their demand for home country products. These market forces cause the foreign currency to depreciate. If the international Fisher effect (IFE) holds, the local investors are expected to earn the same return from investing internationally markets they would from investing in their local as According to the IFE, when interest rate in the foreign country, the home currency should appreciate. nominal interest rate at home exceeds the nominal

Answer 1

If the international Fisher effect holds, the local investors are expected to earn the sae return from investing internationally as they would from investing in their local markets