Assume that international capital markets are competitive and that the real interest rates are the same. The one-year interest rate is approximately 9% in the USA and 5% in Switzerland. If the expected inflation rate is 6% in the USA, what is the expected inflation rate in Switzerland? (Approximately)

Question

Quizplus · Accepted Answer

Using the Fisher equation, we know that real interest rate = nominal interest rate - inflation rate. Since the real interest rates are the same in both countries, we can set them equal to each other: 
9% - 6% = 5% - inflation rate in Switzerland
Simplifying:
3% = 5% - inflation rate in Switzerland
Inflation rate in Switzerland = 5% - 3% = 2% or 2.1% (approximately). Therefore, the answer is C.

Assume That International Capital Markets Are Competitive and That the Real