Final answer:
The International Fisher Effect is most closely related to Uncovered Interest Rate Parity, as it is connected with expectations of changes in exchange rates based on nominal interest rates differentials, without any hedging through forward contracts.
Step-by-step explanation:
The International Fisher Effect is most closely related to d. Uncovered Interest Rate Parity.
The International Fisher Effect (IFE) is based on the premise that differences in nominal interest rates reflect expected changes in the spot exchange rate between two countries. It assumes that investors will expect a higher nominal interest rate in countries with a depreciating currency to compensate for the expected loss in the value of the currency.
Meanwhile, relative Purchasing Power Parity (PPP) focuses on the long-term relationship between the exchange rates and price levels of two countries, suggesting that over time exchange rates should adjust to equalize the price of a basket of goods and services in any two countries. While both concepts deal with exchange rates and interest rates, Uncovered Interest Rate Parity is directly concerned with the relationship between interest rates and future exchange rates without the use of forward contracts or any coverage, which aligns with the basis of the IFE.