You observe that the inflation rate in the United States is 2.3 percent per year
ID: 2649302 • Letter: Y
Question
You observe that the inflation rate in the United States is 2.3 percent per year and that T-bills currently yield 2.8 percent annually.
What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 8 percent per year? (Round your answer to 1 decimal place. (e.g., 32.1))
What do you estimate the inflation rate to be in Canada, if short-term Canadian government securities yield 11 percent per year? (Round your answer to 1 decimal place. (e.g., 32.1))
What do you estimate the inflation rate to be in Taiwan, if short-term Taiwanese government securities yield 13 percent per year? (Round your answer to 1 decimal place. (e.g., 32.1))
a.
What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 8 percent per year? (Round your answer to 1 decimal place. (e.g., 32.1))
Explanation / Answer
US Inflation 2.3 Yield on Treasury bills 2.8 (1+Rf)*(1+Inflation rate) Hence, [(1+Rf)*1.023]-1= 0.028 [(1+Rf)*1.023]= 1.028 (1+Rf)= 1.0049 Thus, Rf= 4.89% Australia Yield on Treasury bills 8 Hence, (1+Rf)*(1+Inflation rate)= 8% Thus, [(1+0.0489)*(1+Inflation rate)]-1= 0.08 Thus, [(1+0.0489)*(1+Inflation rate)]= 1.08 Hence, (1+Inflation rate)= 1.08/ 1.0489= 1.0296 Thus, Inflation rate= 1.0296-1 *100= 2.96% Canada Yield on Treasury bills 11 Hence, (1+Rf)*(1+Inflation rate)= 11% Thus, [(1+0.0489)*(1+Inflation rate)]-1= 0.11 Thus, [(1+0.0489)*(1+Inflation rate)]= 1.11 Hence, (1+Inflation rate)= 1.11/ 1.0489= 1.0582 Thus, Inflation rate= 1.0582-1 *100= 5.82% Taiwan Yield on Treasury bills 13 Hence, (1+Rf)*(1+Inflation rate)= 13% Thus, [(1+0.0489)*(1+Inflation rate)]-1= 0.13 Thus, [(1+0.0489)*(1+Inflation rate)]= 1.13 Hence, (1+Inflation rate)= 1.13/ 1.0489= 1.0773 Thus, Inflation rate= 1.0773-1 *100= 7.73%
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