Question

If interest rate parity holds and the annual Taiwan nominal interest rate is 7% and the US. annual nominal rate is 5% and real interest rates are 2% in both countries, then inflation in Taiwan is about than in the U.S. O 1 % lower O 2% lower O 2% higher O 1 % higher

Answer 1

2% higher

Step-by-step explanation:

Nominal rate = real rate + inflation

In the U.S:

`5\%=2\%+inflation\\inflation = 3\%`

In Taiwan:

`7\%=2\%+inflation\\inflation = 5\%`

The difference between inflations is:

`I_T - I_(US) = 5\%-3\% = 2\%`

Therefore, then inflation in Taiwan is about 2% higher than in the U.S.