Question

If international Fisher effect (IFE) holds

1. interest rates will be able to forecast exchange rates
2. real exchange rates will be equal across the two countries
3. inflation rates will be equal across the two countries

Answer 1

International Fisher Effect Explained:

The Intenational Fisher Effect (IFE) is the difference between two countries nominal Interest rate which is directly proportional to the changes in the exchange rate of countries currencies within the stated period of time.
For Example - If USA's Interest rate is 10% and INDIA's Interest rate is 5%, India's currency have to appreciate roughly 5% compared to USA's currency, A Country with higher Interest rate will also be biased to have a higher Inflation rate.

   a. interest rates will be able to forecast exchange rates

Explanation:

According to the International Fishers Effect (IFE) the difference in the nominal interest rates between countries can be used to estimating the changes in the exchange rates because Interest rates indicates expected interest rates and currency exchange rate changes are drived by inflation rates.