Question

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$.

Answer 1

Yen will Appreciate against US$

Step-by-step explanation:

The relationship between the inflation in an economy and the real and the nominal rates of interest is defined in the Fisher effect. Under this effect it has also been stated that real interest can be calculated by deducting the inflation rate with nominal interest rate given. The link can easily be analysed of real rate of interest, nominal rate of interest, and inflation rate by studying the fisher effect properly.

Thus, in the given case, after applying the International Fisher effect, the rate of Yen will enhance against the rate of US$