If interest rate parity holds and the annual Taiwan nominal interest rate is 7% and the U.S. annual nominal rate is 5% and real interest rates are 2% in both countries, then inflation in Taiwan is about _____ than in the U.S.

Question

Quizplus · Accepted Answer

Interest rate parity suggests that the difference in nominal interest rates between two countries reflects the expected difference in inflation rates. Since Taiwan's nominal rate is 2% higher than the U.S. rate, and real rates are the same, Taiwan's inflation is about 2% higher than in the U.S.

If Interest Rate Parity Holds and the Annual Taiwan Nominal