Question

According to the international Fisher effect, if U.S. investors a 6% rate of inflation in European countries that use the euro and expect a 5% rate of domestic inflation over one year, and, and require a 4% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:

Answer 1

The nominal rate of return is 9%.

Step-by-step explanation:

The reason is that the International Fisher Effect says that the real return on a same investment in different countries is same. It also says that the nominal rate of return difference in two countries is due the inflation rate difference. The nominal rate of return is summation of the two interest rates which is inflation rate and real interest rate.

So

Nominal interest rate = 5% Inflation Rate + 4% Real Return = 9% Nominal rate