Question

You observe that the inflation rate in the United States is 1.9 percent per year and that T- bills currently yield 2.4 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 4 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) b. What do you estimate the inflation rate to be in Canada, if short-term Canadian government securities yield 7 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) c. What do you estimate the inflation rate to be in Taiwan, if short-term Taiwanese government securities yield 9 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Australian inflation rate Canadian inflation rate Taiwanese inflation rate

You observe that the inflation rate in the United States is 1.9 percent per year and that T-bills currently yield 2.4 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 4 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)
b.	What do you estimate the inflation rate to be in Canada, if short-term Canadian government securities yield 7 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)
c.	What do you estimate the inflation rate to be in Taiwan, if short-term Taiwanese government securities yield 9 percent per year? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)

Answer 1

Real Interest Rate in US = (1+Nominal Interest Rate)/(1+Inflation) - 1 = 0.49%.

As per Fischer, Real Interest Rate should be constant. Therefore, Real Interest Rate across all the countries is 0.49%. Inflation can be calculated as (1+Real Interest Rate)/(1+Nominal Interest Rate) - 1. Applying this formula, inflation for Australia, Canada & Taiwan are calculated as 3.49%, 6.48% & 8.47% respectively.

	Nominal Interest Rate	Real Interest Rate	Inflation
Australia	4.00%	0.49%	3.49%
Canada	7.00%	0.49%	6.48%
Taiwan	9.00%	0.49%	8.47%