The expected rate of inflation in Japan is 12% and the expected rate of inflation in Italy is 9%.In Italy the risk-free rate of interest is 6%.What does the risk-free rate of interest have to be in Japan 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 + Japanese risk-free rate)/ (1 + Italy risk-free rate)= (1 + Japanese inflation)/ (1 + Italy inflation).When you plug the numbers into the formula you get an answer of 8.92%

The Expected Rate of Inflation in Japan Is 12% and the Expected