if Canadian inflation is 4 US inflation is 5 and the risk di

if Canadian inflation is 4%, US inflation is 5%, and the risk differential is 1%(Canada is riskier), then Canada’s:

a. real exchange rate is falling.

b. nominal exchange rate is rising.

c. real interest rate is lower than the US real interest rate.

d. nominal interest rate is lower than the US nominal interest rate.

Solution

The correct answer should be D. We consider the Fisher equation here. The correct answer should thus be D, Canada noinal interest rate is lower. The correct answer is D.