The real interest rate in US and Canada are same.
As inflation in Canada is higher, its value will depreciate again the US dollar.
This scheme actually loses money as the amount of loan to be returned is 1.08 USD
a. Using Fisher's equation,
nominal interest rate ~ real interest rate + inflation.
real interest rate = nominal interest rate - inflation
Thus, as the real interest rate in US and Canada are same,
Nominal rate Canada - Inflation Canada = Nominal Rate US - Inflation US
12% - inflation Canada = 8% - Inflation US
Inflation Canada = 4% + Inflation US
Thus inflation in Canada will be 4% higher than in US
b. As inflation in Canada is higher, its value will depreciate again the US dollar. i.e the US dollar will get stronger and Canadian dollar will get weak. The change in the value will be 4%.
c.
Let 1 USD = 1 CAD and amount borrowed be $1 in US for a year.
Amount payable in US after 1 year = $1 * (1 + 8%) = $1.08
Amount converted to CAD = CAD 1
Amount in CAD after 1 year = CAD 1*(1+12%) = CAD 1.12
New Exchange rate after 1 year = 1 * (1 + 4%) = 1.04 i.e 1 USD = 1.04 CAD (i.e USD costs more in CAD)
Amount in USD converted from CAD = 1.12/1.04 = 1.0769 ~ 1.077 USD
Thus, this scheme actually loses money as the amount of loan to be returned is 1.08 USD which is more than 1.077USD earned from CAD interest rates. (This is even without considering the exchange rate transaction fees etc.)
The interest rate is the quantity a lender prices a borrower and is a percentage of the essential—the quantity loaned. The hobby charge on a mortgage is typically referred to on an annual foundation referred to as the annual percentage charge (APR).
An interest rate is the amount of interest due in step with length, as a proportion of the quantity lent, deposited, or borrowed. the entire interest on an quantity lent or borrowed depends on the main sum, the hobby price, the compounding frequency, and the duration of time over which it's far lent, deposited, or borrowed.
An interest rate tells you ways high the price of borrowing is, or excessive the rewards are for saving. So, if you're a borrower, the hobby price is the quantity you're charged for borrowing money, proven as a percentage of the total quantity of the loan.
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