Current one-year interest rates are 4% and 8% in Canada and Spain respectively.The anticipated inflation in Canada is 2%.If international Fisher effect holds, what is the expected inflation in Spain?
A)4.00%
B)4.04%
C)5.92%
D)6.00% real interest (Canadian) =

Question

Quizplus · Accepted Answer

According to the international Fisher effect, the difference in nominal interest rates between two countries should reflect the expected change in their exchange rates. 
In this case, the difference in nominal interest rates between Canada and Spain is 4% (8%-4%). 
Therefore, the expected inflation rate in Spain should be approximately 4% (2%+4%). 
The closest option to this is C (5.92%), which could be rounded up to 6% if necessary.

Current One-Year Interest Rates Are 4% and 8% in Canada