BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the nominal rate, the real rate, and the inflation rate
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the real rate, the inflation rate, and the product of the real rate and the nominal rate
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the real rate, the inflation rate, and the product of the real rate and inflation
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the real rate and the product of the real rate and inflation
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Detailed explanation-1: -The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation.
Detailed explanation-2: -The Fisher effect is a theory first proposed by Irving Fisher. It states that real interest rates are independent of changes in the monetary base. Fisher basically argued that the nominal interest rate is equal to the sum of the real interest rate plus the inflation rate.
Detailed explanation-3: -The precise formula is (1 + nominal interest rate) = (1 + real interest rate) x (1 + inflation rate). Since this formula can be difficult to calculate, a more commonly used formula is i ≈ r + where i is the nominal interest rate, r is the real interest rate and is the inflation rate.
Detailed explanation-4: -The Fisher effect states that an increase in expected future inflation will increase nominal interest rates by exactly the amount of expected inflation. Expected inflation will have no impact on either the quantity of loanable funds or the real interest rate.