Question

Question 32 1 pts Assume the US government security with 1 year maturity (nominal interest rate) is 2% and Japanese government security with 1 year maturity is 1%. Regardless of the current exchange rate (US$ as a base), if you apply the International Fisher Effect to predict the exchange rate, Yen will against US$. O depreciate O appreciate

Answer 1

Answer 32: Appreciate

According to the international fisher effect, countries that have higher nominal interest rates experience higher rates of inflation, because of which they experience currency depreciation against other currencies. Thus in this case, since US has higher nominal interest rate of 2% as compared to the interest rate of Japan which is 1% for the same period of time, currency of US will depreciate or in other words, Yen will appreciate against US$.

Answer 31: Depreciate

Exchange rate of 1.21US$/Euro means 1Euro = 1.21 US $

Thus, price of bigmac in Germany in US$ = 3 x 1.21 = 3.63 US$

That means, the bigmac that costs 5$ in US, the same would cost 3.63 US$ in Germany.

It means that the US$ should depreciate against Euro.