You observe that the inflation rate in the United States is 2.5 percent per year

Question

You observe that the inflation rate in the United States is 2.5 percent per year and that T-bills currently yield 3.0 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 10 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 13 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 15 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Inflation rate

Explanation / Answer

In USA

T bill Rate = 3%

Inflation rate = 2.50%

Real rate in USA = 3% - 2.50%

= 0.50%.

Real rate in USA is 0.50%.

a.

In Australia

T bill Rate = 10%

Real Risk Free rate = 0.50%

Inflation rate in Australia = 10% - 0.50%

= 9.50%.

Inflation rate in Australia is 9.50%.

b.

In CANADA

T bill Rate = 13%

Real Risk Free rate = 0.50%

Inflation rate in Australia = 13% - 0.50%

= 12.50%.

Inflation rate in Canada is 12.50%.

c.

In Taiwan

In Australia

T bill Rate = 15%

Real Risk Free rate = 0.50%

Inflation rate in Australia = 15% - 0.50%

= 14.50%.

Inflation rate in Taiwan is 14.50%.

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