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

Question

18.

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.

What do you estimate the inflation rate to be in Canada, if short-term Canadian government securities yield 6 percent per year? (Do not round intermediate calculations and enter your answer as a percent rounded 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 8 percent per year? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)

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.

Explanation / Answer

T bill rate in USA = 2.3%

Inflation rate in USA = 1.8%

a.

Government securities rate in Canada = 6%

Inflation rate in Canada = (6% / 2.3%) × 1.8%

                                          = 4.7%

Hence, inflation rate in Canada is 4.7%.

b.

Government securities rate in Taiwan = 8%

Inflation rate in Taiwan = (8% / 2.3%) × 1.8%

                                          = 6.3%

Hence, inflation rate in Taiwan is 6.3%.

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