You observe that the inflation rate in the United States is 2.0 percent per year

Question

You observe that the inflation rate in the United States is 2.0 percent per year and that T-bills currently yield 2.5 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 5 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 8 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 10 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Inflation rate %

Explanation / Answer

This question requires application of International Fischer Effect and Purchasing Power Parity, according to which difference between risk free rate and inflation between two countries are equal.

(Risk Free Rate - Inflation)A = (Risk Free Rate - Inflation)B

a. Inflation rate for Australia, when Risk free rate at Australia = 5%

Inflation = 5% - (2.5% - 2%) = 4.5%

b. Inflation rate for Canada, when Risk free rate at Canada = 8%

Inflation = 8% - (2.5% - 2%) = 7.5%

a. Inflation rate for Taiwan, when Risk free rate at Taiwan = 10%

Inflation = 10% - (2.5% - 2%) = 9.5%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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