Suppose that the annual inflation rate is 5%  in New Zealand and 3% in Australia, while the annual nominal interest rate is 4% in New Zealand. According to the prediction of the Fisher effect, the annual nominal interest rate in Australia should be _

The Fisher effect is an economic theory that describes the relationship between inflation and both real and nominal interest rates. The theory states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, the nominal interest rate is equal to the sum of the real interest rate and the expected inflation rate.

Here's how to calculate the nominal interest rate in Australia step by step:

1. First, calculate the real interest rate in New Zealand. According to the Fisher effect, the real interest rate is the nominal interest rate minus the inflation rate. So, in New Zealand, the real interest rate is 4% (the nominal interest rate) minus 5% (the inflation rate), which equals -1%.

2. Then, apply the real interest rate in New Zealand to Australia. According to the Fisher effect, the nominal interest rate in Australia should be the sum of the real interest rate in New Zealand and the inflation rate in Australia. So, the nominal interest rate in Australia should be -1% (the real interest rate in New Zealand) plus 3% (the inflation rate in Australia), which equals 2%.

Therefore, according to the prediction of the Fisher effect, the annual nominal interest rate in Australia should be 2%.