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If interest rate parity holds and the annual Taiwan nominal interest rate is 7% and the US. annual nominal rate is 5% and real interest rates are 2% in both countries, then inflation in Taiwan is about than in the U.S. O 1 % lower O 2% lower O 2% higher O 1 % higher

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Answer:

2% higher

Explanation:

Nominal rate = real rate + inflation

In the U.S:

[tex]5\%=2\%+inflation\\inflation = 3\%[/tex]

In Taiwan:

[tex]7\%=2\%+inflation\\inflation = 5\%[/tex]

The difference between inflations is:

[tex]I_T - I_{US} = 5\%-3\% = 2\%[/tex]

Therefore, then inflation in Taiwan is about 2% higher than in the U.S.

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