If interest rate parity holds and the annual German nominal interest rate is 3 percent and the U.S. annual nominal rate is 5 percent and real interest rates are 2 percent in both countries,then inflation in Germany is about ________ than in the United States.

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus inflation. Since both countries have a real interest rate of 2%, the inflation rate in Germany is 1% (3% - 2%) and in the U.S. it is 3% (5% - 2%). Therefore, inflation in Germany is 2% lower than in the U.S.

If Interest Rate Parity Holds and the Annual German Nominal