Suppose that the one year interest rate is 4% in Canada (domestic country). The expected Canadian inflation rate is 2% and the expected German inflation rate is 3%. If the international Fisher relation holds, the exact one year interest rate in Germany should be _____, and the approximate amount (by linear approximation) should be ______.

Correct Answer: 502% and 5%.

To get the exact amount: (1 + r_Germany)/(1 + 0.04) = (1 + 0.03) / (1 + 0.02) => r_Germany = 5.02%.
To get the approximate amount: r_Germany - 0.04 = 0.03 - 0.02 => r_Germany = 5%.