Question

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Answer 1

Assume that international capital markets are competitive and that global real interest rates
are the same. The one-year interest rate is 9 percent in the United States and 5 percent in Switzerland.
If the expected inflation rate is 6 percent in the US, what is the expected inflation rate in Switzerland?

Answer: is B.

Explanation:

US Switzerland Expected Inflation Rate 6% Real Interest Rate 3% Nominal Rate 9% 5% 2% 3%

To explain how we arrived to the above calculation, we'd look into the below formula:

i = r + P

i is Nominal rate ; r is real Interest Rate; P is the Expected inflation Rate.

To figure out what is the real interest rate, we'd apply the values of nominal rate for US 9% and Expected Inflation Rate of 6% .,

We'd get the Real Interest as => 9%- 6% = 3%

Now remember that real interest rate is similar to both the countries, so real interest rate is 3% for the Switzerland too.

Calculating the same, i = r + P

5% = 3% + P

Expected Inflation for Switzerland is 2%.