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Fisher Effect- U.S and the Euro inflation and currency rates

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Assume that the U.S and the Euro nominal interest rate are equal. Subsequently, the U.S. nominal rate decreases while the Euro nominal interest rate remains stable.

According to the Fisher Effect:

1. Explain what this implies about the inflation rates between the currencies.

2. Explain also what should happen between the two currencies exchange rate.

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Solution Summary

The expert examines the Fisher Effect in the United States and the Euro inflation and currency rates.

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The International Fisher Effect (IFE) suggests that a currency's value will adjust in accordance with the differential in interest rates between two countries. If a particular ...

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