The interest rate offered on (Norwegian) Krone is 0

Finance Apr 27, 2021

The interest rate offered on (Norwegian) Krone is 0.85%, which is quite low. Given the current Covid-19 pandemic, you expect the Krone to depreciate by 0.3%. For the international Fisher effect (IFE) to hold between Norway and Australia, the Australian interest rate should be ____.

A. 0.55%

B. 0.85%

C. 1.15%

D. 1.85%

E. 2.00%

Expert Solution

Answer:

The answer is 1.15%

When the currency depreciate the interest rate will increase as the depreciation in the currency can increase the inflation so the central bank will increase the interest rate so that the effect will be neutral.

Australian dollar = 0.85% + 0.30%

= 1.15%

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