The expected rate of inflation for Japan is 11%.The risk-free rate in Japan is 5% and the risk-free rate in Italy is 2%.What must the inflation rate in Italy be in order 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 7.83%

The Expected Rate of Inflation for Japan Is 11