Question

Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will _______ by about _______. Selected Answer: E. appreciate; 2% Answers: A. appreciate; 3% B. appreciate; 1% C. depreciate; 3% D. depreciate; 2% E. appreciate; 2%

Answer 1

Option E. appreciate; 2%

Step-by-step explanation:

As we know that:

S1 = So * (1 + Interest in Home Country) / (1 + Inflation of Country B)

Here

S1 is the value of franc per dollar after one year which is

S1 = So * (1 + Appreciation) as the home country interest rate is higher than the foreign country interest rate.

So the value of franc per dollar now.

Nominal Interest in Home country USA is 6%.

Nominal Interest rate in Country B is 4%.

So this means that:

So * (1 + Appreciation) = So * 1.06/1.04

So * (1 + Appreciation) = So * 1.019

Dividing by So on both sides, we have:

(1 + Appreciation) = 1.019

Which means

Appreciation is 2%.

Answer 2

Option E

Step-by-step explanation:

Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will appreciate by about 2% .