Prior to beginning work on this discussion forum, read Chapter 8 in your textbook, focusing particularly on theories of exchange rate determination in section 8.3. Select one theory and explain it in your own words, illustrating with an example.
David, P. A. (2021). International logistics: The management of international trade operations (6th ed.). Cicero Books.
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Fisher Effect
The Fisher Effect outlines how both a country’s nominal and real interest rates are related to inflation. The real interest defines the interest rate adjusted to get rid of inflationary impacts. It thus reflects the actual cost of funds incurred by the borrower and the actual yield to the investor or the lender. The nominal interest on the other hand is the price quoted on lending and borrowing transactions disregarding any fees or interest. The Fisher Effect theory states that a country’s real interest rate is equivalent to its nominal interest minus the expected inflation. This implies that an increase in inflation rates result in a fall in real interest unless the nominal interest rates increase simultaneously as the inflation rate. The theory assumes that the real interest does not…
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