Question: You read in a newspaper that the nominal interest rate is 12 percent per year in Canada and 8 percent per year in the United

You read in a newspaper that the nominal interest rate is 12 percent per year in Canada and 8 percent per year in the United States. Suppose that the real interest rates are equalized in the two countries and that purchasing-power parity holds.
a. Using the Fisher equation (discussed in Chapter 4), what can you infer about expected inflation in Canada and in the United States?
b. What can you infer about the expected change in the between the Canadian dollar and the U.S. dollar?
c. A friend proposes a get-rich-quick scheme: borrow from a U.S. bank at 8 percent, deposit the money in a Canadian bank at 12 percent, and make a 4 percent profit. What’s wrong with this scheme?

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a The Fisher equation says that i r e where i the nominal interest rate r the real interest rate same in both countries e the expected inflation rate ... View full answer

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