How much would you expect to receive for a nominal interest rate in Holland if funds can be invested in the U.S.at a rate of 7% when inflation is expected to be 4% in the U.S.and 8% in Holland?
A) 5.19%
B) 7.93%
C) 9.08%
D) 11.11%

Question

Quizplus · Accepted Answer

The nominal interest rate in Holland can be calculated using the Fisher equation: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). The real rate in the U.S. is approximately 3% (7% nominal - 4% inflation). Applying this to Holland's inflation: (1 + nominal rate) = (1 + 0.03) * (1 + 0.08), which gives approximately 11.11%.

How Much Would You Expect to Receive for a Nominal