Question

You observe that the inflation rate in the United States is 2.0 percent per year and that T-bills currently yield 2.5 percent annually.

  

a.	What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 5 percent per year? (Do not round intermediate calculations and 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 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.)

  

Inflation rate

%

  

c.	What do you estimate the inflation rate to be in Taiwan, if short-term Taiwanese government securities yield 10 percent per year? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)

  

Inflation rate

%

Answer 1

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

Real return=((1+0.025)/(1+0.02)-1)*100

Real return = 0.49

a

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

0.0049=((1+0.05)/(1+inflation rate)-1)*100

inflation rate% = 4.5

b

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

0.0049=((1+0.08)/(1+inflation rate)-1)*100

inflation rate% = 7.

c

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

0.0049=((1+0.1)/(1+inflation rate)-1)*100

inflation rate% = 9.5