The inﬂation rate is 3% in the U.S. and 5% in Canada. The nominal risk-free interest rate in Canada is 7%. Based on the International Fisher effect theory, what is the U.S. Treasury bill rate?

Question

Quizplus · Accepted Answer

The International Fisher effect states that the nominal interest rate differential between two countries is equal to the difference in their inflation rates. In this case, the inflation rate differential is 5% - 3% = 2%. Therefore, the nominal risk-free interest rate in the U.S. should be 7% - 2% = 5%.

The Inﬂation Rate Is 3% in the U