Question 3 Real rates. Determine the nominal rates for the three countries listed if they have the following inflation rates and the real rate the world over is 0.73%:Canada: Inflation is 5.81%.Switzerland: Inflation is 2.24%.United States: Inflation is 4.29%.According to the International Fisher effect, what is the approximate nominal rate in Canada?% (Round to two decimal places.)According to the International Fisher effect, what is the approximate nominal rate in Switzerland?% (Round to two decimal places.)According to the International Fisher effect, what is the approximate nominal rate in the United States?% (Round to two decimal places.)

Answered: Question 3

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

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Question 3

Real rates. Determine the nominal rates for the three countries listed if they have the following inflation rates and the real rate the world over is 0.73%:
Canada: Inflation is 5.81%.
Switzerland: Inflation is 2.24%.
United States: Inflation is 4.29%.
According to the International Fisher effect, what is the approximate nominal rate in Canada?
% (Round to two decimal places.)
According to the International Fisher effect, what is the approximate nominal rate in Switzerland?
% (Round to two decimal places.)
According to the International Fisher effect, what is the approximate nominal rate in the United States?
% (Round to two decimal places.)

Expert Solution

Step 1

Given information :

Real rate over the world = 0.73%

Formula for international Fischer effect :

$(1 + N o m i n a l i n t e r e s t r a t e) = (1 + R e a l i n t e r e s t r a t e) (1 + I n f l a t i o n r a t e) T h e r e f o r e, N o m i n a l r a t e = [(1 + R e a l i n t e r e s t r a t e) (1 + I n f l a t i o n r a t e)] - 1$

Step 2

1. Nominal rate in Canada :

$N o m i n a l r a t e = [(1 + R e a l i n t e r e s t r a t e) (1 + I n f l a t i o n r a t e)] - 1 N o m i n a l r a t e = [(1 + 0.73 %) (1 + 5.81 %)] - 1 = 6.58 %$

Step 3

2. Nominal rate in Switzerland :

$N o m i n a l r a t e = [(1 + R e a l i n t e r e s t r a t e) (1 + I n f l a t i o n r a t e)] - 1 N o m i n a l r a t e = [(1 + 0.73 %) (1 + 2.24 %)] - 1 = 2.99 %$

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