You observe that the inflation rate in the United States is 1.7 percent per year

Question

You observe that the inflation rate in the United States is 1.7 percent per year and that T-bills currently yield 2.2 percent annually. What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 6 percent per year? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Inflation rate percentage What do you estimate the inflation rate to be in Canada, if short-term Canadian government securities yield 9 percent per year? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Inflation rate percentage What do you estimate the inflation rate to be in Taiwan, if short-term Taiwanese government securities yield 11 percent per year? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Inflation rate percentage

Explanation / Answer

First we need to compute real risk free rate r*.

R* = t bill yield – Inflation rate

      = 2.20% -1.70%

      = 0.50%

Part A)

Inflation rate = t bill yield – R*

                          = 6% -0.50%

                          = 5.50%

Part B)

Inflation rate = t bill yield – R*

                          = 9% -0.50%

                          = 8.50%

Part C)

Inflation rate = t bill yield – R*

                          = 11% -0.50%

                          = 10.50%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.