If interest rate parity holds and the annual German nominal interest rate is 3 percent

B) 2percent lower

Explanation:

Nominal interest rate = Real interest rate + inflation rate

Inflation rate = Nominal interest rate- real interest rate.

For Germany:

Given

Nominal rate = 3%

Real interest rate= 2%

Inflation rate = 3%-2%

Inflation rate for Germany = 1%

For United State:

Nominal interest rate = 5%

Real interest rate = 2% (same as for Germany)

Inflation rate = 5%-2%

Inflation rate for US = 3%.

The inflation rate in US is therefore 2% higher than that of Germany OR the inflation rate in Germany is about 2% lower than that of the United States.