1. In early 1990, Japanese and German interest rates rose while U.S. rates fell. At the same time, the yen and DM fell against the U.S. dollar. What might explain the divergent trends in interest rates?
2. In late December 1990, one-year German Treasury bills yielded 9.1%, whereas one-year U.S. Treasury bills yielded 6.9%. At the same time, the inflation rate during 1990 was 6.3% in the United States, double the German rate of 3.1%.
a. Are these inflation and interest rates consistent with the Fisher effect? Explain.
b. What might explain this difference in interest rates between the United States and Germany?