Asked by Ariyon Powell on Jun 19, 2024
Verified
Canadian Treasury bills are yielding 2.6% and the annual inflation rate in Canada is 1.8%. What is the inflation rate in Japan if the short-term government bonds in Japan are yielding 1.2%?
A) .4%
B) .8%
C) 1.2%
D) 1.6%
E) 2.0%
Treasury Bills
These are short-term government securities issued at a discount from their face value, maturing in one year or less.
Inflation Rate
The percentage rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
Government Bonds
Fixed-income securities issued by a government to support government spending, often considered low-risk investments.
- Explore the repercussions of inflation on the real earnings from risk-free investments in various countries.
Verified Answer
SD
Sebastian DeodatJun 19, 2024
Final Answer :
A
Explanation :
The real yield (yield after adjusting for inflation) of both countries' government securities should be equal assuming no currency risk and that markets are efficient. The real yield in Canada is 2.6% - 1.8% = 0.8%. Therefore, for the real yield in Japan to also be 0.8%, the inflation rate in Japan must be 1.2% - 0.8% = 0.4%.
Learning Objectives
- Explore the repercussions of inflation on the real earnings from risk-free investments in various countries.