Suppose that the Canadian economy, on a fixed exchange rate, has a real growth rate of 2 percent and is in equilibrium with an inflation rate of 10 percent and a risk premium of 1 percent. Suppose that changes in the United States cause its real rate of interest to increase from 3 percent to 4 percent and its inflation rate to increase by two percentage points. When the Canadian economy has settled to a new equilibrium after this change, what is the nominal interest rate?
