Canadian Treasury bills are yielding 2.6% and the annual inﬂation rate in Canada is 1.8%. What is the inﬂation rate in Japan if the short-term government bonds in Japan are yielding 1.2%?

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus the inflation rate. Therefore, the real interest rate in Canada is 2.6% - 1.8% = 0.8%. The real interest rate in Japan is 1.2% - x, where x is the inflation rate in Japan. Since the real interest rates in Canada and Japan are equal, we have 0.8% = 1.2% - x. Solving for x, we get x = 0.4%.

Canadian Treasury Bills Are Yielding 2