Question

Suppose that the nominal risk-free rate of interest is 2.75%, and that of Russia is 5%. The inflation rate in Russia is 3.25%, what is the inflation rate in US? Use the equation for the International Fisher effect

Answer 1

International Fisher Effect says that Real Interest rate across globe is same.

Nominal Rate = Real Interest Rate + Inflation rate

So, Real Interest Rate = Nominal Interest Rate - Inflation rate

Real Interest Rate of Russia = Real Interest Rate of US (As per International Fisher Effect)

Nominal Interest Rate in Russia - Inflation Rate in Russia = Nominal Rate in US - Inflation Rate in US

So, 5% - 3.25% = 2.75% - Inflation Rate of US (Solving LHS and RHS we get)

Inflation Rate in US = 1%

So the inflation rate in US is 1%