In the United States the expected rate of inflation is 4% and in Canada the expected rate of inflation is 8%.The risk-free rate of interest in the U.S.is 3%.What would the risk-free interest rate have to be in Canada for real interest rate parity to hold?

Question

Quizplus · Accepted Answer

To calculate this answer you need to use the real interest rate parity formula.The formula is (1 + Canadian risk free rate)/ (1 + U.S.risk free rate)= (1 + Canadian inflation)/ (1 + U.S.inflation).When you plug the numbers into the formula you get an answer of 6.96%.

In the United States the Expected Rate of Inflation Is