U.S. (Nominal Interest Rate) = 4% Canada (Nominal Interest Rate) = 5% According to economic theor...
U.S. (Nominal Interest Rate) = 4%
Canada (Nominal Interest Rate) = 5%
According to economic theory, investors will move their funds from U.S. to Canada because they earn a better interest rate, therefore, demand for Canadian $ will increase, so Canadian $ will appreciate, and $ will depreciate.
According to the fishier effect, real interest rate is assumed to usually be in equilibrium.
So, Nominal Interest Rate = Real Interest Rate + Expected Inflation
U.S. 4% = 3% + 1%
Canada 5% = 3% + 2%
The problem is, according to economic theory, country with higher inflation rate will have depreciated currency.
So, how do you explain this contradiction?
Homework Answers
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