Question

You observe that the inflation rate in the United States is 1.5 percent per year and that T-bills currently yield 2.0 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 8 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 9 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 _____ %

Answer 1

Answer:

(a) 7.5%

(b) 8.5%

(c) 9.5%

Explanation:

(a) Foreign country inflation rate - US inflation rate = Foreign country risk free rate - US risk free rate

Lets foreign country inflation rate = X

X - 1.5 = 8 - 2

X - 1.5 = 6

X = 6 + 1.5

   = 7.5%

(b)

Lets foreign country infllation rate = X

X - 1.5 = 9 - 2

X - 1.5 = 7

X = 7 + 1.5

   = 8.5%

(c)

Lets foreign country inflation rate = X

X - 1.5 = 10 - 2

X - 1.5 = 8

X = 7 + 1.5

   = 9.5%