Despite this fact, it would be simplistic to state that G8 should not have the ability to make financial decisions independent of the UN and other international influence. As the countries that have provided the majority of financing for the world's poorest countries, it may be that the continued financial health of those countries depends upon them getting a financial benefit from such financial assistance. Therefore, the current world economy may actually depend on the ability of G8 to operate independently from the broader international community.
Q3: How does the Fisher effect impact the ability to forecast currency exchange rates? If the real interest rate is constant across borders, one would expect a constant currency exchange rate, but this does not occur. On the contrary, currency exchange rates are subject to a tremendous amount of fluctuation. Why does this occur?
A3: The Fisher hypothesis posits that in integrated capital markets, the real interest rate is not dependent upon monetary measures like the nominal interest rate, but instead reflects a relationship between the nominal interest rate and the expected rate of inflation. The Fisher hypothesis is largely based on the principle of monetary neutrality. Therefore, changes in a country's currency's exchange rate can be expected to catch up quickly with internal changes in that country's economy. However, the Fisher effect cannot always be used in calculating exchange rates, especially when one of the countries has a prohibitive economy. For example, many developing countries place great internal restrictions on nominal interest rates and rates of inflation, which make capital market integration more difficult. These restrictions can mask a country's actual financial condition, making it impossible to determine the appropriate currency exchange rate.
Q4: What could one expect if the international community made the decision to convert to one form of international currency, rather than using different forms of currency in each country?...
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