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Fisher effect

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Fisher effect

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • August 12, 2021 at 4:21 pm #631358
    Nikitagarwal
    Participant
    • Topics: 153
    • Replies: 146
    • ☆☆☆

    True / false
    The international Fisher effect can be used to predict the real interest rate.

    It should be true as per my understanding , I understand it is used to calculate actual interest rate , but isnt real rate a part of the formula ?

    August 12, 2021 at 4:33 pm #631368
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51576
    • ☆☆☆☆☆

    It is a trick question.

    The Fisher formula allows us to calculate the real interest rate from the actual interest rate (or the other way round).

    However the International Fisher Effect is used to forecast future exchange rate based on the inflation rates in the two countries, which in theory also change with the interest rates in the two countries. It is not used to predict interest rates.

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