Question: Consider two countries with a single good (potatoes) and a single investment asset (risk-free bank deposits). In Country 1, the interest rate on bank deposits

Consider two countries with a single good (potatoes) and a single investment asset (risk-free bank deposits). In Country 1, the interest rate on bank deposits is 5% and the increases of the price of potatoes is 1%. In Country 2, the interest rate on deposits is 40% and the increase of the price of potatoes is 36%.

Find the real return on bank deposits in either country using both the approximate and the exact formulae.

How can you explain the large discrepancy of the approximate formula in these two countries?

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