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Fisher Effect Mechanics & Exchange Rate Fluctuations

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Please provide me assistance with an explanation of the Fisher effect, its mechanics, and how it can be applied in the hypothetical situation below. Also please explain how implications of exchange rate fluctuations as they relate to marketing and production decisions.

You are asked to help put together a training program describing the effects of exchange rates to training participants at Nealtus. Your training material is to address the following:

Discuss the Fisher effect and explain its mechanics by walking the trainees through a step-by-step explanation in the following hypothetical situation:
If the real interest rate is 6%, the U.S. inflation rate is at 3%, and the Japanese inflation rate is a 2%, what are the nominal interest rates for both the U.S. and Japan? Interpret the calculation for your trainees.
Discuss some implications of exchange rate fluctuations for Nealtus as it relates to marketing and production decisions.

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Solution Summary

This solution explains the Fisher Effect and the breakdown of the equation as well as computes the exchange rate fluctuations between Japan and the US.

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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