When domestic interest rate changes, it will affect the exchange rate. However, the effect depends on the source of change in the domestic interest rate.

Use the Fisher equation to identify the 2 sources of change in the domestic interest rate.

Explain how changes in each source (identified in part i) will impact the exchange rate. Compare the effects to bring out the difference. You can assume each source of change (identified in part i) increases.

Answer rating: 100% (QA)

The Fisher equation is a mathematical formula that shows the relationship between nominal interest rates real interest rates and inflation rates The F... View the full answer