ECONOMICS
MONEY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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real interest rate fell by 4%.
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expected inflation rose by 3%.
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expected inflation fell by 3%.
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real interest rate must rise.
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Detailed explanation-1: -According to the equation given by Fisher, the nominal interest rate can be computed by adding the inflation rate and the real interest rate. This implies that the nominal interest rate will be 8% by following the fisher equation, according to the question.
Detailed explanation-2: -For example, if the rate of return for bonds you hold is 6% and the inflation rate is 3%, then the real rate of return will be 3%, not 6%.
Detailed explanation-3: -Answer and Explanation: The nominal interest rate (rn ) is 7%. The inflation rate (i) is 3%. The real interest rate is 4%.
Detailed explanation-4: -According to the Fisher effect, if inflation rises then the nominal interest rate rises. If the real interest rate is 5% and the inflation rate is 3%, then the nominal interest rate is 8%. Inflation induces people to spend more resources maintaining lower money holdings.