Suppose and the 1-year forward rate is . The real interest rate on a risk-free government security
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Suppose and the 1-year forward rate is
. The real interest rate on a risk-free government security is 2 percent in both the United Kingdom and the United States. The U.S. inflation rate is 5 percent.
a. What is the United Kingdom's inflation rate if the equilibrium relationships hold?
b. What is the United Kingdom's nominal required return on risk-free government securities?
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