You observe that the inflation rate in the United States is 1.8 percent per year

Question

You observe that the inflation rate in the United States is 1.8 percent per year and that T-bills currently yield 2.3 percent annually. Use the approximate international Fisher effect to answer the following questions. a. What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 3 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Inflation rate % b. What do you estimate the inflation rate to be in Canada, if short-term Canadian government securities yield 6 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Inflation rate % c. What do you estimate the inflation rate to be in Taiwan, if short-term Taiwanese government securities yield 8 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Inflation rate %

Explanation / Answer

A) United States Australian

Inflation rate 1.8%   

T-bills currently yield 2.3% 3%

The International Fisher Effect (IFE) is an economic theory that states that an expected change in the current exchange rate between any two currencies is approximately equivalent to the difference between the two countries' nominal interest rates for that time

RUS- hUs= Rau- hau

Real rate in USA -Inflation rate in usa =Real rate in Australia- iflation rate in Australia

=2.3%-1.8% =3% - Iflation rate in Australia

Iflation rate in Australia =2.5%

b) Real rate in USA -Inflation rate in usa =Real rate in Canada- Inflation rate in Canada

2.3%-1.8% =6% - Inflation rate in CanadA

Inflation rate in Canada =5.5%

c)Real rate in USA -Inflation rate in usa =Real rate in Taiwan- Inflation rate in Taiwan

2.3%-1.8% =8% - Inflation rate in Taiwan

Inflation rate in Taiwan =7.5%

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